While the idea behind the two is the same, there are some differences between the two that you need to understand. First a second mortgage is generally based on your credit score, while a home equity loan is based on the equity of your home. If you fail to pay back a second mortgage you will suffer damage to your credit, but you may be able to avoid foreclosure. Depending on how a home equity loan is structured you may lose your house if you fail to repay. While a home equity loan sounds severe with the right lender you’ll be able to get the money you need and repayment terms you can live with.
How does a Home Equity Loan Work?
Home equity loans use the equity in your home as collateral for the loan. Your credit can be less than perfect and you can still get a decent interest rate, unlike a conventional second mortgage. Equity is the true value of your home. If you have a home worth $500,000, you have a mortgage that is $100,000 your equity would be $400,000. You can borrow up to 70% of your equity (so you can maintain a controlling interest in your home) for a variety of purposes.
What Can Home Equity Loans be Used For?
You can use them for virtually anything you like, but spending the money wisely is the most important part of getting a loan. Many people will reinvest the money right back into their home so they can bring up the value (and the equity!) of the house. Others will spend it on retirement and enjoy their golden years, while others will send their children or themselves to university to get a better job. The good thing about a home equity loan is you only have to pay interest on the money you borrow; you don’t have to borrow the entire available amount and you can even use it to repair your credit.
Be Careful About Home Equity Loans
When getting a home equity loan you need to be careful. You’ll want to go to a mortgage broker to find a good rate and see different competing offers from various lenders. When you choose us as your mortgage broker we’ll be able to find you an exact match for your needs for your home equity loan; walking you through the paperwork and the terms of the loan you’ll go into things eyes wide open and will be able to avoid sticker shock before you get to the negotiating table.
Home equity loans aren’t right for everyone. If you’re not sure what option is right for you, we can help you evaluate your finances; you may qualify for a second mortgage or private loan (bad credit isn’t always bad credit!). Many factors like credit, how much equity you have available and if you’ve borrowed against your home in the recent past will affect how much you can get for your home equity loan.
Contact us today and see what we can do for you.