What's the difference between a Home Equity loan and a Home Equity Line of credit?

Question

I have a mortgage of 200K.I have a first mortgage of 160K at a fixed rate of 5.785% over 30yrs. and the 2nd one's 40K at 9.00% fixed.Now,the value of my place went up to about 350K in the last 4 years.Should I stay with my current plan or should I re-finance? And if I do,which way should I go? Home Equity loan or Home Equity line?

Answer 1

With $160k @ 5.785% and $40k @ 9.00% fixed, your blended rate is 6.428%. So if you were to refinance both mortgages, you should look for a rate that is lower than that. If you were to refinance just your 2nd mortgage, you should look for a rate that is lower than 9%.

If you were to refinance both mortgages, you wouldn't get either a Home Equity Loan (HEL) or a Home Equity Line of Credit (HELOC). You would get a new first mortgage, that would replace both of your current mortgages.

If you just want to refinance your 2nd mortgage, you could go with either an HEL or a HELOC.

HELs are generally fixed rate mortgages, like your current 2nd mortgage. They are for a single amount, and cannot be borrowed from again.

HELOCs are lines of credit that usually have variable rates, often based on the prime rate (i.e. prime + 1). For the first 5 - 10 years, you can borrow money agains the HELOC, often just by writing a check or using a debit card. During the time that you can take additional money out of the HELOC, you usually only have to pay the interest on the money that you have borrowed. Once you can no longer borrow money, the loan payment schedule will reset and you will have to start paying back principal, as well as interest. This can cause your payment to go up significantly.

Which type of loan you should get, or if you should stick with your current loan structure really depends on what you are trying to do. Would you rather have one loan or two? Would you rather be able to draw money out if you need to, or not?

Answer 2

I love the hostility towards the mortgage industry LOL Hi, I am a certified mortgage planner. A refinance loan is when you refinance the first (and if you have one a second lien) into a new loan. I have to demonstrate something called Benefit to the Borrower to do one. IE, lowering interest rate, going from ARM to fixed rate mortgage, lowering overall payments etc. The rules to refinancing have changed in the last 6 months, drastically. The main reason to refinance right now is if you are in a ARM and can move to a fixed rate mortgage, the rates are very comparable right now. But I couldn't say whether they will stay that way. Home Equity Loan is a second lien on the property. On title it comes after your first. I have never seen an ARM on one of these. They are usually fixed for a term of 15-20 years, sometimes 30. Home Equity Line of Credit is obtained from a bank. It is a line of credit that can be a fixed or adjustable rate. As you pay own the line, you have access to it again. It is sort of like a credit card, but the collateral is your home and if you don't pay it the consequences are huge. They are usually available to you for a specific time ie., 10, 15 or 20 years. IF you have more questions, please feel free to contact me. As a CMP my goal is to be a resource and tool for people. Good luck.

Answer 3

A Home Equity Loan is simply a mortgage, often called a Second Mortgage (or third, if you already have two loans on your property.) When the bank issues you the home Equity Loan you get a lump of cash for you to spend, and you have a set time, payment and interest to repay it.

In a Home Equity Line of Credit- You don't actually get a loan at that time. it is like a credit card, but instead of drawing off of your bank account, it draws off your home equity. You can leave it there, and don't use it, not paying anything to the bank. But if something comes up, like you need to make home repairs, say, you simply write a check off the credit line and the loan begins then, for however much you actually use.

So you could have a HELOC for $50,000, not use it for 6 months (and pay nothing) then use $20,000 and start making payments on the $20,000 you used.

Hope this helps

Answer 4

Unless you plan on taking out any money to renovate or pay down any high interest credit cards (consolidate). The goal would be to keep your current interest rate on your first, and get rid of your 2nd as soon as you can without having to re-fi. To re-fi now would put you in the same interest rate on any HELOC or fixed loan. The difference between the to 2 is that one is fixed and one is a credit line (limit).

By paying every two weeks will help you decrease on the years of the loan, and save you much more in interest. Then if you are able add any additional to the principle, will only continue to give you a plan of action. Set a goal to pay your second within 5-10 years.

If you have any question feel free to contact me.

Answer 5

You should consolidate your 1st and 2nd mortgage so you get a better rate for one single loan. Home equity loan or line of credit is the same. If you need to borrow money, home equity lines may be one useful source of credit. Initially at least, they may provide you with large amounts of cash at relatively low interest rates and they may provide you with certain tax advantages unavailable with other kinds of loans.

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