What is a home equity loan?
The home equity loan, or second mortgage as it is sometime called, is a loan that is used to obtain cash by someone who already owns their home and uses the equity they have in their home to obtain cash for other purposes. Home equity loan rates are usually higher than mortgage rates. The major reason for the higher rate is because home equity loans are a higher risk for the lender than a mortgage. If a borrower defaults on a home equity loan, the mortgage lender has the primary right to the property and would have the opportunity to recover their losses before the home equity lender. Home equity loans are also usually provided to a higher percentage of the home's value than a mortgage would be. When deciding whether to obtain a home equity loan, you should first consider whether it makes more financial sense to refinance your mortgage to obtain the additional cash you desire rather than to obtaining a home equity loan. To do this, compare what your monthly payment would be if you refinanced your mortgage at current mortgage rates to the monthly payment cost of keeping your existing mortgage and obtaining a new home equity loan. You may also want to consider how quickly each option would be repaid and future interest changes that may be possible if any of the loans have variable rate features. You should also consult your tax advisor when deciding whether to obtain a home equity loan to determine if the interest you will pay on the home equity loan is tax deductible.
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