Home Equity Line of Credit and Second Mortgages

At some point in most people's lives the family financial situation is such that some kind of loan must be considered. Credit cards are widely available, of course, and in most cases these are sufficient to cover the cost of a major appliance, car repairs, or even a special vacation. Personal loans are useful for larger purchases, but they are usually limited in size according to a person's income, and they are not always available to everyone. But those families that have significant equity in their home have a powerful source of available funds, usually just for the asking. They can apply for a home-equity loan.

A home-equity loan, as the name indicates, is based entirely on the value of the home. However, only that part of the value that is not already tied to a mortgage can be considered in determining the amount of money available. If, for example, a house is valued at $300,000 and a mortgage of $200,000 already exists on the property, the equity to be considered is in the amount of $100,000. Most banks and other financial institutions will allow an equity loan on up to 75% of the available equity. In this case the maximum loan would amount to $75,000.

As with conventional mortgages, home-equity loans come with a variety of terms and conditions. The lender will answer any questions asked, but the onus is upon the borrower to make sure the arrangement suits the family financial situation. It is also important for the borrower to understand that a home-equity loan is in fact a second mortgage. This means that if the loan is not repaid, the lender has legal entitlement to seek reimbursement through the sale of the mortgaged property.

One outstanding advantage of a home-equity loan is that approval is easy to obtain. Even those with a bad credit record can obtain funds if they can prove substantial equity in their home, though higher interest rates would probably apply in this case. Banks know that this kind of loan is secure, and they are usually willing to be flexible in working out the details. A wise applicant will realize this, and will be able to negotiate the most favorable interest rate and the most reasonable closing fees.

Home-equity loans are most frequently offered in the form of a revolving credit line. Under this arrangement, clients can increase the amount of the loan after a period of time without having to renegotiate the terms and conditions. Many families find that this is an excellent way to cover the cost of typical family expenses from college fees to home renovations. As banks place no restrictions on how a home-equity loan is used, borrowers can be completely flexible in using the secured funds.

A home-equity revolving line of credit can be a convenient way of borrowing, but care must be taken to avoid perpetual debt with no clear plan for debt retirement. Regular monthly payments should form part of any plan to borrow money. It is also important for borrowers to be clear about changing interest rates, minimum payments required, and the service fees involved. With due care and attention, however, a home-equity line of credit can be one of the best ways to borrow money.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.