What's a Home Equity Loan?
A home equity loan, or 2nd mortgage, allows you to borrow against your home's equity to pay for home improvement, debt consolidation, large expenses, education costs, or a rainy-day fund. Home equity lines of credit (HELOCs) and home equity loans (HELOANs) are two options.
Home Equity Strategies…
The first step is ensuring there's enough equity in the property to borrow against. This is determined by analyzing the current Loan-To-Value ratio. LTV is computed by taking your current loan balance divided by your home's value. For example, if you owe 300k, and the home is worth 500k, your LTV = 60% (300k/500k=60%). Maximum LTV's for 1st mortgages are around 80%, while 2nd mortgages allow Combined LTV's (CLTV's) up to about 90%.
To complete a cash-out refinance on just your 1st mortgage, prevailing mortgage rates should be similar to your current 1st mortgage rate. However, if your current 1st mortgage rate is far less than prevailing rates, then a 2nd mortgage allows access your home's equity while retaining the existing low interest rate on the 1st mortgage. The "blended" or "weighted" interest rate between your current 1st mortgage and proposed 2nd is critical to our analysis, as is the amortization schedule on your existing 1st mortgage.
A HELOC is an adjustable-rate revolving line of credit. It’s like a credit card, except with a HELOC, your home is the collateral. You can charge it up & pay it down, over and over.
A HELOAN resembles a traditional fixed-rate loan. You borrow a specific amount and then make fixed regular payments during a pre-determined repayment period.