The breakdown for Home Equity Loans and HELOC Loans – HELOC -(home equity lines of credit)
updated 8-7-21
Interest rates are somewhat the same and let’s say that you have a 2.900 -3.000% first mortgage interest rate. You are thinking that you do not want to jeopardize your low interest for a higher rate. You also do not want to refinance your current mortgage just to get an extra 20 thousand, or whatever amount you need.
From an underwriter’s point of view, you are thinking wisely. You may want to opt for a home equity loan or home equity line of credit (HELOC).
However, if you have other resources available that will not diminish your financial status, or deplete your saving, you could also use those funds. This would be the more favorable, but as most know this is not the best-case scenario for all.
Home Equity Or HELOC
Home equity or HELOC loan is based upon how much equity you have, what your present loan to value is for your first mortgage loan, and the current value of your home.
You may want to obtain college funds or to buy a car for your teenager. Many needs can arise from time to time. A home equity loan and home equity line of credit (HELOC) can be your choice but done with a critical thinking process.
You still must qualify with the bank or lender of choice. This will depend upon your credit and your debt to income.
If you are having trouble with making your payments now, you could possibly consolidate some of your debt into either loan type or pay them off or down with some of these monies.
Your home is your collateral for both home equity loans and HELOC loans.
What Actually Is a Home Equity Loan?
These loans are based on the equity you have in your home. If you made a 20% down payment when you bought your home, you could have a considerable amount of equity.
This is especially you have been paying on your home for at least 5 years, and you wanted to make get the total amount of equity to 100% loan to value (if the prospective lender will allow). This depends solely upon how much principal you have already paid on your mortgage loan.
This type of loan is a type of a second mortgage on your home, and the funds are disbursed in a lump sum with a fixed interest rate and term.
The rate of interest is a fixed interest rate over the life of the loan.
What is a Home Equity Line Of Credit?
A home equity line of credit or HELOC is a loan usually with a variable interest rate. You may make draws at a different time for funds in the line of credit. It is based upon the draw period of the note. Lenders have different variables for making HELOC loans.
Your payment may increase or decrease with the fluctuation of interest rates with a line of credit.
Who Makes Home Equity Loans and HELOC Loans?
Where do you go to find the best Home Equity Loan and HELOC loans? Most any bank specializes in Home Equity Loans, and HELOC. Your lender of the first mortgage for your home may originate a second mortgage or HELOC loans as well. *see above for home equity loans origination terms
HELOC loans originated based upon the following:
- How much equity you have in the property determines how much you can borrow; i.e., the present loan to value ratio of the first mortgage. *same for Home Equity Loans
- If the value has declined, you will not have as much equity, or if the value has increased, there could be greater equity. *Same for home equity loans
- HELOC loans are lines of credit, i.e., variable rate loans, where you can pay the interest-only payments, or you can pay a fully amortizing payment as well. It is always best to make a fixed-rate repayment.
- HELOC loans can also be fixed-rate loans if you choose.
When you pay interest-only payments this could eventually hurt you financially if you are not careful. This is due to the fact that you will not be reducing the principal of the loan.
When you have to start making the entire principal and interest, the rate could be much higher with a much higher payment.
Example Only: If you were to obtain a HELOC, your interest rate may be based upon the Prime Rate + 2.000 percentage points for the variable loan rate. Right now, as of August 5, 2021, the Prime Rate is 3.25% re: US Bank Prime Rates with history. Therefore, your home equity line of credit interest will be higher than your first mortgage rate.
Bankrate -Wall Street Journal Prime Rate- which is a surveyed rate trending states the same.
Factors To Consider For a HELOC Variable Rate of Interest
- The prime rate usually changes about every six weeks and this can change your interest rate. If your HELOC is a variable rate, the payment can change.
- A fixed-rate of interest is always better than a variable rate unless of course, you do not plan to stay in your current residence for an extended period.
- It is easy to slip behind and pay only the interest on the loan. That is not a good practice as it could make a difference in your final amortization of your principal.
- With a HELOC you do not have to draw all of the funds at one time, therefore you are only paying interest on the amount drawn.
- The term of either loan is based upon your first mortgage, your financial repayment ability, etc.
- There is not as much paperwork with these types of loans as there is for a first mortgage loan.
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