Obtaining A Home Equity Loan - Your home can be a powerful asset long before you sell it. By borrowing against your home equity—through a home equity loan or home equity line of credit—you can consolidate debt, finance home improvement projects, or pay for other expenses.
While both types of loans require you to have equity in your home, their terms are different. Understanding how each loan works can help you determine which option makes sense for you.
Obtaining A Home Equity Loan
Home equity is the difference between the fair market value of your home and the outstanding balance of all liens on your property. In other words: it's the part of the house that belongs to you, not your lender.
Home Equity Loans
Your equity should increase over time as you pay off the balance of your home loan. You can build equity even faster by paying off your mortgage every week. When you pay off your balance each week, you end up paying an additional monthly payment each year - ending up owning your home even longer.
With a home equity loan and home equity line of credit, you can access the equity you've built up in your home while you're still living there.
Both types of loans are considered a second mortgage on your home. With both, you are borrowing against your equity. You use your home as collateral, which helps protect your lender. This means that if you default on your loan, your lender can foreclose on your home and sell it to try to recoup their losses.
Because you use your home as collateral, these loans typically offer much lower interest rates than personal loans or credit cards.
Reverse Mortgage Vs. Home Equity Loan Vs. Heloc: What's The Difference?
Once you get a home equity loan or home equity line of credit, you can use the funds for any purpose you choose, including:
Each loan will appear on your credit report as an additional open transaction line. If you maintain a positive payment history on your loan, it can help your credit score.
You will need to consult your tax advisor to determine if you qualify for a home equity loan or home equity line of credit.
While a home equity loan and home equity line of credit share some things in common, their terms are quite different. Below is a breakdown of the key differences between the two home equity options:
How To Refinance A Home Equity Loan
Ultimately, it comes down to personal preference. If you are not sure which loan is right for you, you can always contact an expert for guidance!
Remember, you are taking out a second mortgage on your property. Every time you think about doing this, think carefully about why you are doing it. Since your home acts as collateral, it's even more important to make your payments on time, every time.
And if you plan to sell your home, you'll need to pay off your loan or line of credit in full first.
However, with careful planning, a home equity loan or line of credit can be a powerful way to leverage the equity you've built up. If you're a homeowner and at least 62 years old, you may be able to turn your home equity into cash to pay for living expenses, health care costs, home improvements, or anything else you need. This option is a reverse mortgage. However, homeowners have other options, including home equity loans and home equity lines of credit (HELOCs).
Home Equity Loan Vs. Heloc: What's The Difference?
All three allow you to tap into your home equity without having to sell or move out of your home. However, these are different loan products and you should understand your options so you can decide which one is best for you.
A reverse mortgage works differently than a term mortgage—instead of making payments to the lender, the lender makes payments to you based on a percentage of your home's value. Over time, your debt grows—as payments are made to you and interest accrues—and your equity decreases as the lender buys more and more of it.
You continue to own your home, but once you leave home for more than a year (even involuntarily for hospitalization or a nursing home stay), sell it, or die—or become delinquent on your property taxes or insurance, or The house falls apart - the loan expires. The lender sells the home to get back the money they paid you (plus fees). Any remaining equity in the home goes to you or your heirs.
Carefully study the types of reverse mortgages and make sure you choose the one that best suits your needs. Check the fine print - with the help of a lawyer or tax professional - before you sign. Reverse mortgage scams that seek to steal your home equity often target adults. The FBI recommends that you don't respond to unsolicited ads, be suspicious of people who claim they can give you a free home, and don't accept payments from private individuals for a home you didn't buy.
Home Equity Has Hit A Record High. 6 Ways To Get The Lowest Rate On A Home Equity Loan Now
Keep in mind that if both spouses have their names on the mortgage, the bank can't sell the house until the other spouse dies - or the listed tax, repair, insurance, move or sale of the house occurs above. Couples should thoroughly research the surviving spouse issue before agreeing to a reverse mortgage.
There may also be other disadvantages, such as high closing costs and the possibility that your children will not inherit the family home if they are unable to repay the loan. Interest charged on a reverse mortgage usually accumulates until the mortgage is terminated.
Discrimination in mortgage lending is illegal. If you believe you have been discriminated against because of your race, religion, gender, marital status, use of public assistance, national origin, disability or age, there are steps you can take. One such step is to file a report with the Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD).
Like a reverse mortgage, a home equity loan allows you to turn your equity into cash. It works the same way as your primary mortgage – in fact, a home equity loan is also called a second mortgage. You take out the loan as a lump sum and make regular payments to pay off the principal and interest, which is usually a fixed rate. Unlike a reverse mortgage, you don't have to be 62 to get one, and you have to start repaying the loan immediately after taking it out.
Alternative Options For Accessing Your Home Equity
With a home equity line of credit (HELOC), you have the ability to borrow up to an approved credit limit as needed. In this regard, a HELOC works more like a credit card.
With a regular home loan you pay interest on the entire loan amount, but with a HELOC you only pay interest on the money you actually withdraw.
The fixed rate on a home loan means you always know what your payment will be, while the variable rate on a HELOC means the payment amount changes.
Currently, the interest you pay on home equity loans and HELOCs is not tax deductible unless you use the money for home improvements or similar activities on the residence securing the loans. Before the Tax Cuts and Jobs Act of 2017, interest on home equity debt was fully or partially tax deductible. Please note that this change applies to the years 2018 to 2025.
Cash Out Refinance Vs. Home Equity Loan Key Differences
Plus—and this is an important reason to make this choice—with a home equity loan and HELOC, your home remains an asset to you and your heirs. However, it is important to note that your home is used as collateral, so you risk losing your home to foreclosure if you default on the loan.
Reverse mortgages, home equity loans, and HELOCs all allow you to turn your equity into cash. However, they differ in terms of payment and repayment, as well as requirements such as age, equity, credit and income. Based on these factors, below are the main differences between the three types of loans.
Reverse mortgages, home equity loans, and HELOCs all allow you to turn your equity into cash. So how do you decide which type of loan is right for you?
In general, a reverse mortgage is considered a better option if you are looking for a long-term source of income and don't mind your home not being part of your estate. However, if you are married, make sure the surviving spouse's rights are clear.
Let Your Equity Work For You
A home equity loan or HELOC is considered a better option if you need short-term cash, can make monthly payments, and prefer to keep your home for your heirs. Both have significant risks along with their benefits, so consider the options thoroughly before taking either action.
HELOCs and home equity loans often have fewer or no fees and lower or no closing costs compared to reverse mortgages. Reverse mortgages have mandatory counseling sessions and typically have much higher closing costs than traditional mortgages.
The reverse mortgage will take the longest to process with mandatory counseling sessions, closing notices and the like. A HELOC is usually processed a bit faster than a home equity loan, with several lenders advertising closing times of less than 10 days. In comparison, most mortgage lenders advertise turnaround times of between two and six weeks.
Home Equity Loan: Tap Into Your Home's Equity
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