Interest and Loans: Second Mortgage, Home Equity Loan, and Home Equity Line of Credit
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Home Equity Debt: Home Equity Loan and HELOC
You can tap the current value of your home and spend it other things, or even on your home itself, by using home equity debt. Just like an ordinary mortgage, the debt uses your home as collateral (or the property used as guarantee that the debt will be repaid). The equity of your home, or the difference between the current value of your home and the remaining balance on your mortgage/s, can be converted to cash and can be temporarily lent to you. However, you have a shorter period to repay the debt compared to mortgage.
There are two types of home equity debt you can apply for:
Home Equity Loan
A home equity loan lends you a fixed amount that must be paid within a set term. It is also called a closed-end home equity loan because you cannot borrow any more than you have already borrowed. The monthly paying off of the debt is regular with fixed interest rates. Sometimes lenders can provide even more than the equity of the home; these are called over-equity loans.
Home Equity Line of Credit or HELOC
A home equity line of credit or HELOC works much like a credit card. There is a credit limit for the given term of the loan and you can continuously borrow as long as the available credit line has not been used up. When you pay for the principal, the amount you can borrow is "replenished." HELOC offers variable interest rates, which influence the amount you have to pay back from time to time. In this sense, it is also called an open-end home equity loan.
The draw period is the term when you are allowed to borrow money and make your monthly payments, typically only for the interest though you can choose to pay the principal. The repayment period is the term when you have to pay the debt back and are no longer allowed to borrow.
Second Mortgage
A second mortgage is a type of loan that "reuses" an existing property that already has a loan/mortgage on it. They are also considered subordinate to the first mortgage/loan because if a default (failure to comply with the agreement of the loan) occurs, the first mortgage must be paid off first. Also, second mortgages usually have higher interest rates than the first.
Home equity loans and HELOCs are usually options for second mortgages.
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