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Home Equity Loan

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HIGHLIGHTS
  • Examine what a Home Equity Loan (HEL) is.
  • Review how a HEL differs from a Home Equity Line of Credit (HELOC).
  • Understand that fewer lenders offer HELs than offered them in the past.

Everything You Need for Your Home Equity Loan

What is a HEL?

A home equity loan (HEL) is often referred to as a second mortgage. A home equity loan is money you borrow that is secured by your ownership stake in your home.  Home equity loans are similar, in some ways, to standard primary mortgage loans. Both have fixed principal amounts disbursed when the loan closes, pre-set payment schedules, and either adjustable or fixed interest rates.

Home equity loans also share similarities with Home Equity Lines of Credit (HELOCs). Both HELs and HELOCs are loans that sit in a junior lien position to your primary mortgage. You use both to finance expenditures and purchases of a personal nature, such as debt consolidation,  medical expenses, education costs, home improvement projects,  and large-ticket items.

However, you should also be aware how home equity loans differ from standard mortgages, including refinance mortgages. A HEL has higher costs than a primary mortgage. The lender takes on a higher risk, because of its junior lien position and the fact that HELs have a higher rate of default.  The lender charges you more to offset its risk. You may find it hard to take out a HEL from anyone other than your primary mortgage lender. A 'stand alone' second mortgage,  a second mortgage taken on its own and not in conjunction with a first mortgage, is offered by far fewer lenders than was the case a few years ago .

HELs are different than HELOCs, because HELs have a fixed loan amount and payment schedule, whereas HELOCs are revolving lines of credit, only paid on as you use the credit line. Additionally, HELs require principal and interest for the life of the loan, while HELOCs allow a period of interest only payments. HELs usually are available with fixed interest rates, where HELOCs usually come with variable interest rates.

When to take a HEL

HELs are ideal for one-time purchases or use when you know how much money is required, such as debt consolidation or a home-improvement project with a fixed budget. Borrowing form your home equity may be the only way you can finance these events, as unsecured loans are now very difficult to obtain and  if available  are only available at very high interest.

The primary disadvantage of home equity loans is that if cannot make your payments, you put your home at risk for foreclosure. If you borrow a lot of the equity from your home and the value of your home drops, you may not be able to sell your home and pay back all the money you owe on it. When you have two loans, the total debt is referred to as the CLTV (combined loan-to-value).  90% CLTV is the most liberal CLTV maximum available for a HEL. Some lenders cap CLTV at 80%, some at 85%. The state you live in can also restrict the CLTV maximum and different states have different CLTV caps. Condominiums have stricter borrowing caps than single-family residences.

Qualifying for a HEL is harder than it used to be. Lenders have stiffened their requirements, in terms of maximum amounts they will lend and the credit worthiness that you must demonstrate.

Summary 

If you're looking for a home equity loan, use Bills.com's Savings Center to find the best deal. When interest rates are low, you should look at all your borrowing options, incudling refinancing your primary mortgage, or taking out a second mortgage. When you understand what kind of loan best fits your needs, you increase your chances of finding the right loan.

 

Comments (4)


Michelle P.
December 04, 2011
I live in Michigan and have a mortgage, up to date. I have a Heloc with BOA for $35,000 which the loan is due April 2012. It was an interest only loan. I've talked to them about modifying my loan but they won't talk to me until January for some reason. I need atleast 5 years on this to pay them in full. I've never been late on any payments and my credit is above 750. Do you find they will usually help modify loans, what are my chances of offering them an amount less than my loan for payoff?
Bills.com
December 05, 2011
I wish I had a crystal ball I could look into and tell you whether your loan servicer will modify one or both of your home loans. Alas, I do not. I doubt that even if you got the president of your loan servicer on the phone, he or she would not be able to answer that for you honestly. We are years into this crisis and the loan servicers are still not processing modifications efficiently. My best advice is for you to apply, keep copies of everything you send the loan servicers, and follow all of its instructions completely. Incomplete applications seem to get lost more often than complete applications.
Beth M.
Chino Hills, CA  |  November 11, 2011
My son, had a home equity on a property that was not in his name. The property got foreclosed so now BOA sued him and won by default. I am afraid they will garnish his wage for loan that he only got part of it and who ever facilitated it got most of the money. He is also about to settle a debt on a credit card. I had a feeling my son needs to file bankruptcy because of this two case. the credit card also sued him and about to have a judgement when I talk to them and about to agree to settle.
Bills.com
November 13, 2011
You are correct in assuming that the BOA will pursue the deficiency balance and seek a court judgment, which can lead to wage garnishments. Your son should not settle his credit card debts without looking at the bigger picture.

There are different options available when dealing with credit card debt, including bankruptcy. Read bills.com article about comparing debt options and seeking debt relief help.
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