The kitchen needs remodeling. A child goes off to college. There are times in many people’s lives when there’s a need for extra cash. Fortunately, a second mortgage can help. A second mortgage is a financial product that uses the equity in your home as collateral for a loan. Two types of second mortgages exist. One, a home equity line of credit (HELOC), functions like a credit card. Another, a home equity loan, extends a fixed amount of credit with a repayment schedule similar to a first mortgage. Regardless of which loan you decide to take, it’s important to know the distinctions between mortgage products.
What is a Home Equity Line of Credit?
Significant differences exist between a home equity line of credit (HELOC) and a home equity loan. With a HELOC, only interest is charged on the amount taken out from your home’s equity during the draw period. The draw period is a specific amount of time during which you can access funds. This period is often 10 years. After that, you must make standard repayments of the principal and interest on the money taken out of the HELOC. The shift from interest-only payments during the draw period and the subsequent payment of interest and principal outside of the draw period can surprise you. Often, payments rise significantly outside of the draw period. A second lien is placed on your home when you take out a HELOC. Your home is on the line if you default on your payments in the repayment period.
What are Combined Loan-to-Value (CLTV) Ratios?
HELOC interest is calculated as a combined loan-to-value ratio (CLTV). A CLTV takes into account all loans a person has. CLTV is calculated in the same way as a basic loan to value ratio (LTV). LTV is a ratio of a mortgage amount and the appraised value of a property. This ratio determines the amount of the loan extended to a person. If you have more than one loan, CLTV determines how much credit is extended for a HELOC.
What are the Differences between a HELOC and a Home Equity Loan?
There are significant differences between a HELOC and a home equity loan. A home equity loan is a lump-sum loan of money leveraged on your home’s equity. Unlike HELOCs, home equity loans have fixed interest rates, closing costs, and maybe points. A home equity loan is more akin to a first mortgage than a HELOC. If you are sure that you will only need a certain amount of money, a home equity loan may better suit your needs. It’s important to differentiate between a home equity loan and refinancing. With refinancing, a new loan is taken out to replace an existing loan. The difference in value between the loans is then pocketed by the homeowner.
Is Identity Theft and Fraud a Concern?
If you decide on a HELOC, be aware of identity theft and fraud. Criminals can obtain personal identity information and use this information to open a HELOC in your name. Also, criminals can manipulate existing accounts. In any case, the intent is to never repay the loan. Debtors often don’t know that their identity has been stolen until the mortgage company contacts them, they receive calls from a debt collector, or are informed of a pending eviction. Particularly vulnerable to identity theft are people who have paid their mortgages for people with good credit.
The decision for a second mortgage shouldn’t be taken lightly. If you’re contemplating a HELOC, Heloc rates Utah could save you thousands of dollars in interest. Having a reputable lender that understands your unique situation and can craft a loan that meets your specific needs can help take the stress out of a second mortgage.