There are several different home equity loan options. Some can be a better alternative than others depending on your circumstances, mortgage rates, and the purpose of your home equity loan. The MA home equity loan guide offered below may help you understand your options.
Different Types of Home Equity Loans
A cash-out refinance pays off your old mortgage and replaces it with a new one. The new mortgage covers the balance of the old mortgage, the extra funds you are taking out and applicable settlement costs. Because you are paying off the existing mortgage, rather than taking out a new loan as a second mortgage, the rates may be lower than a second mortgage. This is essentially a traditional refinance except that you are extracting equity in the real estate. Those additional funds are paid to you in one lump sum. When reviewing a cash-out refinance, compare the rate of your existing mortgage with the new one. If your existing rate is higher, then the new lower rate will save you money. Otherwise, you may want to ask about other options and preserve your first mortgage rate.
Home Equity Loan
A home equity loan is a second mortgage in addition to your first mortgage. With this alternative, you borrow a specific amount that you pay back over a specific amount of time, either at a fixed rate or at one that adjusts at set intervals. Second mortgage rates tend to be higher than first mortgage rates. Settlement costs also still apply.
Home Equity Line of Credit (HELOC)
A home equity line of credit typically has an adjustable rate that changes with the prime rate. HELOCs are open-ended, so they operate like credit cards. The lender determines your maximum credit limit. You can access money up to that limit as needed. Your payment reflects the running balance. As your balance lowers, the remaining credit may still be available for use. Credit limits may be changed by the lender should significant changes occur in the real estate market.
Find out about annual fees, cancellation fees, and mandatory balances or withdrawal restrictions. Similar to credit cards, HELOCs can be changed by the lenders at any time. This loan type may be good if you are unsure about needing the maximum amount of the loan. However, keep in mind that the maximum allowed can be reduced, limiting the available funds.
MA Home Equity Loan Guide
All home equity loans are based on the current market value of your real estate and the amount of existing loans. You can estimate your equity by calling a local real estate agent for an estimate on its value. Mortgage companies will request appraisals to determine a more exact figure before approving the loan. Be careful not to pull out more equity than you realistically require. Also ensure that the new mortgage payments are within your budget. All home equity loans use your real estate as a lien, allowing them to foreclose if you do not make payments. This MA home equity loan guide is intended as a simple overview. Consult with a local mortgage consultant for applicable interest rates, closing costs, and other solutions.