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Is A Home Equity Loan A Mortgage

    A home equity loan is generally a better option than a cash-out refinance if you are nearly paying off your current mortgage, or you are already at a super-low mortgage rate. While you will save on closing costs, rates for home equity loans are usually higher than those for a mortgage. The interest rates for home equity loans – although higher than those for first-lien mortgages – are far lower than those for credit cards and other consumer loans. The amount you borrow for a home equity loan is smaller than for a home equity refinance — so you are paying interest on a smaller amount.

    You borrow the cash lump sum, then repay it in equal payments over the fixed length of your Home Equity Loan, typically with a fixed interest rate. Once approved, you get one-time payments for the loan amount, which many people use to cover big, one-time expenses. There is still a total amount borrowed, but you borrow only as much as you need, and then you repay and borrow again.

    With both, the amount of money you are allowed to borrow is determined by your homes value, as well as how much equity you have. To determine whether you are eligible and how much you can borrow, the lender will take an appraisal of your home. The lender runs credit checks and orders a home appraisal to determine your creditworthiness and your overall loan-to-value ratio.

    To figure out how much equity you have in your home, you can figure your Loan-to-Value Ratio (LTV) by dividing your current mortgage balance by your homes appraised value. Also, your loan-to-value ratio (LTV) should be at 85% or lower, meaning that after taking equity out, you will still have at least 15% equity in the house.

    For example, if your home is worth $400,000 and you have an outstanding mortgage of $230,000, then your LTV (or your equity) will be around 58 percent (230/400=.575×100=57.5%) and you will have 42% equity. For example, if your home is appraised at $300,000 and your mortgage balance is $150,000, you would have $150,000 in equity, or 50 %.

    Equity is the amount your home is worth now, less the amount of any existing mortgages on the home. Your equity is the difference between how much you owe on your mortgage and how much you would be able to receive for your home if you sold it. Your lender will use your financial situation and how much equity you have in your home to determine your loan amount.

    If you are looking to take equity out of your home using your home mortgage, then the loan type you would take is a cash-out refinance. A cash-out refinance replaces your existing mortgage with a new mortgage larger than the amount you are currently lending. A cash-out refinance allows homeowners to refinance their homes for more than they currently owe, and get the additional amount in one lump-sum payment. A cash-out refinance allows you to borrow against the existing equity, releasing additional cash to use on debt consolidation, education expenses, and more.

    A cash-out refinance can provide borrowers with access to lower interest rates than are available with HELOCs or Home Equity Loans, as a refi acts like a first-lien mortgage, thus, it is a lower risk to lenders. The new mortgage has a larger balance than the existing mortgage on the house, and the difference is returned to you as cash at closing.

    Because the resulting loan to equity is secured against the borrowers home, if borrowers are not making timely payments, then a loan-to-equity company may foreclose. This means home equity loans are risky to the mortgage lenders, since they will be paid back in the event of foreclosure. Some borrowers take out second mortgages to cover renovations on their homes or other big expenses, such as college tuition.

    Some borrowers use home equity loans to consolidate debt into one, lower-interest monthly payment, while others use home equity loans to pay for kitchen remodeling, college expenses, or even vacations in Hawaii. Personal loans can be secured or unsecured, making them an excellent option for homeowners who do not have much equity in their homes, or borrowers who do not want to put up any collateral. Mortgage rates are typically far lower than other products, such as credit cards or personal loans, since you are mortgaging your home in order to borrow the money, making them generally a less expensive kind of loan. Because your home is used as collateral on HELOCs and HELOAs, the interest rates for these loans can be lower than those of other types of loans.

    This also means you repay the HELOC gradually, according to how much you use, instead of paying off the full amount of the loan, as with credit cards. You pay interest on the full amount of the loan, even if you are using it incrementally, such as on a current renovation project. However, unlike a Home Equity Loan Creditors Loan (HELOC), borrowers get the full amount of the loan upfront – instead of drawing on it as needed. You have $175,000 of equity in your house, and can use $175 of that as collateral to secure a loan.

    Subtract the balance on your mortgage, and you will have an approximation of how much you could borrow in a loan against the home equity – $97,500, in this case. Select “Refinance” when selecting your loan type, and you will get a valuation for the amount of equity you have in your current home. To verify the fair market value of your home, your lender may also request an appraisal to determine how much you are entitled to borrow.

    By choosing HEL, you will have access to equity without having to extend your existing home loan terms or modify the interest rates. This means that you keep your original home loan and take on a second, smaller mortgage along with it.

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