Is There a Difference Between Home Equity Loans, Lines of Credit and Second Mortgages?

Both a Home Equity Line of Credit (HELOC) and a Home Equity Loan are methods used by home owners to obtain funds for their own purposes, and such lending arrangements are secured by the borrowers property. Many Home Equity Loans are referred to as Second Mortgages, and the majority of lenders, brokers, and borrowers use these terms interchangeably.

Home Equity Loan (Second Mortgage)

This is an extremely popular and common technique used by home owners to capitalize off of the equity that has built in their homes over the years due to both mortgage loan repayment and property value appreciation. Home owners work with lenders to request funds equaling an acceptable percentage of such equity, and the terms of that loan permit the property to be used as collateral in the event of default.

Since this loan is simply a method to take advantage of the propertys equity, the borrower must understand that the original mortgage loan is unaffected by the new financing, and therefore must also continue to be repaid. A home equity loan is a relatively easy and acceptable way of using the increased value of ones property, but it also presents another potential liability and threat in the event that the borrower is unable to make the monthly payments.

Home Equity Line of Credit (HELOC)

The HELOC is another common means of capitalizing on the increased value and equity in a piece of property. With this type of financing, lenders will make available to the home owner an amount of money that he may spend at will. This amount is determined after assessing the current value of the home, along with the other predictable application documents. After approval, most lenders provide the borrower with a debit card, a checkbook, or both. These instruments are connected to the line of credit offered by the lender, so that he is only responsible for monthly payment amounts based on his use of funds.

It is extremely important that borrowers also understand their house is being used as collateral for such access, and there exists a legitimate danger of losing ones property if monthly minimum payments are not honored. Additionally, the HELOC will most likely have a variable interest rate, meaning also that the minimum payment due will vary regardless of the borrowers spending.

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15 May 2008 | Bad Credit Equity Loan | Comments