If you are considering tapping into your home’s equity to consolidate debts or do some home improvements, you should know your options. Below, you will find the three most common equity loan types available:
1. Home Equity Line of Credit (HELOC)
The first type is the HELOC. With this option a lender will give you a line of credit equal to a predetermined amount of your home’s equity. You can then draw money out as you wish and only make payments on what you take. This works well for long-term home improvement projects where you will need to frequently buy materials, but do not need all of the money at once. Typically these loans have adjustable rates tied to the prime rate.
2. Fixed Term Second Mortgages
This lump-sum mortgage gives you a certain amount of your equity at one time. Frequently, these loans are used for debt consolidation and can save borrowers hundreds of dollars per month. Usually offered in 10, 15, or 20-year terms, these loans often feature fixed rates ranging from a few points higher than conventional first mortgages to rates in the low double digits, depending on your credit rating.
3. The Over Equity Mortgage
For borrowers with no equity in their homes whatsoever, there is a third option: the over-equity mortgage. Although risky to lenders and consumers, these loans where you can borrow up to 125% of your home’s value can save you a lot of money when debt consolidating and can be great for smart, value-enhancing home improvement projects. Even with extremely high interest rates, these loans are still good options for borrowers unable to find unsecured loans that meet their needs.
Now that you know your options, you will want to carefully consider which one is right for you and make a wise borrowing decision.