Many people are considering using home equity to fund larger financial needs, but the lingo from the mortgage industry has confused what some terms mean,A including Second Mortgage Home Equity Loans and Home Equity Lines of Credit (HELOCs). Standard home equity loans and piggyback loans typically carry fixed rates, but HELOCs are always structured as adjustable-rate mortgages for the time you may be drawing on your credit line. Because your equity is backing the line, you would pay substantially less in interest than with a credit card. HELOCs usually have variable rates tied to the prime rate, so payments would not be as predictable as with fixed-rate home equity loans.
In contrast, HELOCs let you borrow smaller amounts if needed, and the interest rates are typically adjustable. You can borrow repeatedly from the HELOC, up to the credit limit, or not require another loan once the balance is paid down, like with a credit card.
In contrast, you save interest on only one second mortgage through arbitrage, meaning that you use money borrowed from your second mortgage to pay down higher-interest debts, or buy things that you otherwise would have used your higher-interest credit card to purchase. Also, the interest can be deductible on if you use a second mortgage to purchase, build, or substantially improve the house that was used to qualify for the loan. The term second means if you are unable to make the mortgage payments anymore, and the house is sold to repay the debt, this loan is paid second.
As with any mortgage, if a loan is not paid off, a home may be sold to pay off remaining debts. Once the mortgage is paid off, though, the lender releases its lien on the property and it no longer has any claim on the collateral. A second mortgage uses equity in your house as collateral, which is why lenders are willing to offer lower rates.
Because a 2nd mortgage is secured against equity in your home, the interest rates on second mortgages can be considerably lower than other borrowing options, such as credit cards or unsecured personal loans. Because second mortgages are secured by equity in your home, they are typically the lowest-rate option for borrowing a fixed amount of money, where the predictability of the monthly payment is a major priority. When you take out a second mortgage, you borrow against the equity that you have built in your home–in other words, the difference between your homes value and the remaining balance on your first mortgage–your house as either a loan or as a line of credit.
The amount of equity in your home fluctuates over time, as you pay off the mortgage loan and the propertys value rises or falls. Generally, you should have between 15% to 20% equity in a home, meaning that the remaining mortgage does not exceed 85 percent of the homes total value.
The amount of money homeowners are allowed to borrow is determined by the difference between the homes current value and their total outstanding mortgage debt. The amount borrowers are allowed to borrow is determined by the difference between their homes current market value and their homeowners outstanding mortgage balance.
If a borrower subsequently faces financial difficulties and is unable to make monthly payments on a home equity loan or second mortgage, the lender forecloses on the house in order to satisfy the debt obligations of the borrower. A cash-out Texas home equity refinance loan, also known as a Section 50(a)(6) loan, is another home equity loan that allows homeowners to refinance their existing mortgage using the equity in their home. Homeowners may be able to refinance their Texas cash-out loan to a conventional loan after a one-year period, however, doing so may not make sense depending on current interest rates at the time. Sometimes, you may be able to take advantage of a cash-out refinance, in which you leverage new equity in your home and receive a lump sum of cash while increasing the mortgage loan to near the original amount.
A cash-out refinance gives you a single mortgage payment rather than two; the interest rates are usually lower than those of home equity loans, or HELOCs; and if you are paying high interest rates on your existing mortgage, you could save big by locking in lower rates or shorter terms. The second loan, or mortgage, on your house would be either a home equity loan, which is a lump-sum loan with a fixed term and interest rate, or a HELOC, which has varying rates and continued access to funds. If you need money for something that requires periodic payments, like if you are sending one of your kids off to college and need the money to pay tuition, or you are planning on making a number of home improvements in the coming years, a HELOC loan may be a better fit, as these loans do not charge you interest on the money that is not being used.
The drawback here is that if you exceed $50,000 on your project, you might have to take out another loan or a credit card to complete the project. For example, in buying a $300,000 house, you could use the $240,000 principal mortgage, the $30,000 jumbo loan, and a $30,000 down payment to cover $300. Borrowers buying higher-value homes may borrow the Fannie/Freddie/FHA-limit conforming mortgage, and then finance the remainder using the piggyback loan and the down payment.
This means that there is significant risk to taking out any of these loans if you cannot afford to repay them. Because the second mortgage is the second lien, the rates on 2nd mortgages are slightly higher than lenders charge on the main mortgage.
With real estate values rising nationwide, a line of credit or a home equity loan can be a great way to keep the first mortgage in place while leveraging equity to make home improvements. A home equity line of credit can be the best choice for situations in which the homeowner has recurring financial needs, like repeated child-care payments or a number of home-update projects, and wants to continue drawing down cash when needed.