Accessing Home Equity
US home owners are sitting on a close to record 34.5 trillion in untapped home equity according to Bankrate. They estimate that the average home owner with a mortgage has $302,000 of home equity available to them.
A common way to access some your home equity is to refinance your home loan to a new term. Since interest rates have been holding where they are, many homeowners do not want to increase their rate to refinance. In this case the solution is to access your home equity using a fixed rate second mortgage or a HELOC (Home Equity Line of Credit)
If you are considering tapping into your home equity it’s important to understand the different types of home equity loans and how they might work best for you.
Fixed Rate Second Mortgage vs. HELOC
Both a fixed rate second mortgage and a HELOC are a common and well respected way to access equity in your home. However it is important to know that while these will both give you access to cash equity in your home, they are set up very differently.
Home Equity Line of Credit
A HELOC is a revolving line of credit that you can borrow against, pay back and borrow from again over a set time. Monthly payments on your HELOC can adjust monthly with current market conditions and current rates.
During the draw period you are able to withdraw money as you need it. The draw period typically lasts for 5-10 years. During the draw period you will make monthly interest only payments. However after the draw period ends you will enter into the repayment period where you will make monthly payments towards both principal and interest for a period of 10-20 years.
The benefit of the HELOC is that you only have to borrow what you need during the draw period. If you end up needing less money than you expected you only make your payment on what you borrowed during the draw period. However there is a risk that interest rates can increase during the draw period and lead to larger monthly payments than you had hoped when starting the HELOC. You may also end up borrowing more from your line of credit than you had originally planned to which would also increase the monthly payment.
HELOC’s can be a powerful tool for borrowing against the equity you have built up in your home. They offer great flexibility and can be a source for funds should an emergency need arise.
Fixed Rate Second Mortgage
A fixed rate second mortgage provides you with a lump sum of money upfront. You will begin making monthly principal and interest payments for the funds borrowed monthly after you close on the second loan. These payments will have a fixed interest rate with predictable payments for the life of the repayment. Fixed rate second mortgages typically have a repayment period of 10-30 years.
The benefits of a fixed rate second mortgage is the predictability of your payments. Similar to a refinance, you can access your home equity but you don’t need to reset the interest rate on your entire home loan balance. The interest rate may be higher than what you currently have but you will be clear on the repayment terms and you are only paying that higher rate on the borrowed equity.
The fixed rate second mortgage does lack the ability to only borrow the money you need when you need it.
A fixed rate second mortgage is an example of a simple interest scenario with a standard amortization schedule while a HELOC is an example of compound interest similar to how credit card interest is calculated. Simple interest will result in significantly less interest paid over the life of your loan.
The Legacy Mortgage team works tirelessly to identify the best loan product for each individual client’s needs. Our experience and local partnerships mean that we have garnered extensive knowledge in the mortgage industry and we understand that different loan programs suit different scenarios. There is no cookie cutter solution for all borrowers and we pride ourselves on finding the best fit for you. In addition to a large variety of loan products we also offer both HELOCs and Fixed Rate Second Mortgages to allow our clients the best solution to access their equity.
Legacy Mortgage team collectively boasts over a 160 years of industry experience and is well versed in a variety of loan programs including fixed mortgages, ARMs, VA loans, FHA, first time homebuyer and more! We have the privilege of partnering with the best local agents, appraisers and attorneys the Upper Valley has to offer. When you work with Legacy Mortgage you are working with the best local professionals from beginning to end. Reach out to the Legacy Mortgage team to get the loan process started. Call us today, 603-643-7400.