There are basically two types of home equity loans, HELOAN and HELOC. HELOAN has a fixed interest rate. The borrower usually receives a check for the entire loan amount immediately after closing (technically, three days after closing). The monthly payment, consisting principal and interest, is fixed for the entire loan term.
HELOC stands for Home Equity Line of Credit, much like the line of credit your credit card issuing bank extends to you, with your home as the collateral. The borrower may make withdrawals and repayments as often as needed, up to the credit limit. The interest rate is adjustable, usually pegged to a certain index, such as the Prime Rate published in the Wall Street Journal. Monthly payments vary depending on the outstanding balance and interest rate. Required payment consists only of the interest charge on the amount owed for the preceding month. Repayment of the principle is not required until the second half of the loan term.
This loan is ideal for those who prefer the budgeting ease of fixed payments.
The factors that determine your HELOC interest rate you get is the margin you receive plus the current prime rate. The margin you get will also affect your rate however this number will not change like prime. A few of the factors that determine the margin is the combined loan to value of your current 1st mortgage and proposed 2nd, desired HELOC line amount and your mid credit score.
Some lenders are now offering no-closing-cost home equity lines of credit (HELOC), those so called "house poor" homeowners may now have the equity, which they have been putting half of their paychecks in to build, work for them for a change. And No Closing Cost means no title fees, no appraisal fees, and no recording fees, etc. incurred by the homeowner.
Home Equity Line of Credit is abbreviated as HELOC. This refers to a loan in which the lender agrees to lend a maximum amount within an agreed time period. A Home Equity Line of Credit in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you may borrow up to (this is not a check). A draw period usually lasts anywhere from 5 to 25 years and allows you to borrow HELOC funds whenever you feel the need; you’re only required to pay back the amount you use plus interest.
A Home Equity Loan is a loan secured by the equity in your home and provides a potential tax deduction. You can use the equity you've built in your home for any purpose, consolidating debt, purchasing a car, installing a pool or paying for your child's college education.
Prime rate has changed drastically lately and those that had great HELOC's a few years ago are now paying MUCH higher rates. Your mortgage broker can compare the different options for you!
It is also possible to get a HELOC in the FIRST LIEN position. Before people just though of a HELOC as a "2nd Lien" loan, but that is not the case.
If your equity is sitting in your house it's not making money for you. You can take out a loan for the equity or a portion of the equity in your home and invest in a growth fund and accumulate the funds to pay off your house faster than if you just paid down on your one mortgage. You equity it's self doesn't have value until you use it. And your interest is tax deductible.
Use a home equity loan for major purchases such as a new car, boat or motor home. The interest rates and payment amounts are sometimes much more appealing than a regular line of credit or loan.
HELOC or Home Equity Line of Credit mortgages are very often used as the 20% second mortgage component of an 80/20 style 100% financing deal.
Most home equity lines use the prime rate as a base for setting interest rates. For example, you hear lenders describe rates as prime + zero or prime + 1. This means the borrower will pay monthly interest according to the Prime Rate (lets use an example prime rate of 7.75%) plus a margin. In this case, prime + zero would equal an interest rate of 7.75%, or in the case of prime + one it would be 8.75%. Additionally, most home equity lines have interest only payments.