I am questioned regularly about home equity lines of credit and second mortgages. These two products offered by banks are very different and suited for different purposes. But they both use your home as collateral.
A home equity line of credit is similar to a credit card only with a higher credit limit.
You are initially approved for a specific amount of credit — your credit limit — meaning the maximum that you can borrow at one time. This limit is usually based on a percentage of the net value of your home, 75 percent of the net value being the maximum.
For example: Your home is appraised at $200,000. Seventy-five percent of that is $150,000. You owe $110,000 on your mortgage. Your line of credit is $40,000.
But wait a minute. Before you run out and spend it, remember that your ability to repay the loan is another factor.
Home equity loans are usually set for a period of time — three years, five years, 10 years. The interest rate usually adjusts with the prime rate. You actually have a checkbook to write yourself a "loan" whenever you want. And you will be required to pay a minimum each month — the current interest, with the option of paying any amount on it.
You can pay the loan off at any time and have use of the open balance for the life of the loan — like a credit card. At the end of the loan period you will be required to pay off the entire balance. This type of loan is ideal for short-term investments.
If you are planning to use the money for long-term investment, such as an addition to your home or a pool, you may want to consider a second mortgage. This is exactly what it sounds like. You can borrow a fixed amount of money, take the entire proceeds at once, and use it as use please.
The guidelines for borrowing a second mortgage are similar to the equity line of credit. However, you will have the option to fix the payment and interest rate for the life of the loan. Payments will be amortized, meaning that, along with the interest, you will pay part of the principle every month and after a set amount of years the loan will be paid off. This type of loan may be the better choice for longer-term purchases.
The fees related to both types of loans are similar — appraisal, application and recording fees. The second mortgage may demand additional closing costs. The line of credit usually calls for a yearly maintenance fee. Sometimes, however, you'll find that banks offer no-fee equity lines.
One final thought. If you plan to stay in your home, you may want to think about refinancing your home, especially if you have had your current mortgage for a long time and may now be able to get a better interest rate.
As you can see, numerous options and products are available. As with all legal documents, do your homework. Read and understand the disclosures from the lender before signing anything .
While I have given you an overview, it is important to speak with a lender about the specifics of these and other loan options.
Send your real estate questions to Ron DeCesare at sage@poconorecord.com.
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