You’ve heard about Home Equity Loans, HELOCs, 2nd mortgages, and so on, but maybe you’re unsure what those loans are and why you might want one. Here’s a quick introduction to Home Equity loans and Home Equity Lines of Credit (HELOC):
What is a “second mortgage”?
Home equity loans and lines of credit are both examples of second mortgages. Both give you, the home owner, an opportunity to use some of the equity you’ve built up as you’ve made your mortgage payments. The amount you can borrow for a second mortgage is partly based on the equity you have in your home.
“Equity” is the difference between your home’s current value and the amount you have left to pay on your mortgage. Let’s say you bought a home for $100,000; subtracting your down payment and the monthly payments you’ve made so far, you now owe $70,000. Assuming your home’s value is still $100,000, you have built $30,000 in equity. Many homeowners borrow against that equity to make improvements on their home or when they need cash for other reasons.
The difference between a home equity loan and a home equity line of credit
When you are approved for a home equity loan, you receive the entire amount of the loan at one time. The loan term may be for 5, 10, or 15 years. Home equity loans are often at a fixed rate, meaning the interest rate stays the same for the life of the loan. Your house is security for the loan. These loans can make borrowers eligible for a tax rebate, so it’s a good idea to let your tax preparer know you have a home equity loan.
A home equity line of credit (HELOC), on the other hand, operates more like a credit card: there’s a maximum amount you can borrow, but you can take out less than that amount. The loans are often variable rate, set to follow the movement of the market. The benefit of a home equity line of credit is that you are paying interest only for what you use at any given time. You can pay back as you go or draw more on your line of credit when the need arises.
How much can I borrow?
The amount you can borrow with a home equity loan or HELOC is based on several factors. You’ll want to have a shiny, bright credit score to get the lowest possible rate. And underwriters will take a look at your income and financial obligations (debt). But 2nd mortgages are also based on your “LTV” or loan to value ratio.
LTV is the amount you still owe on your mortgage divided by the appraised value of your property. In the example above, we said you purchased your home for $100,000. However, that may not be the “appraised value” of your property any more. If you’ve made improvements or your area is a popular one for purchases, the value of your home could be more than $100,000. On the other hand, in challenging financial times, home values may drop. You can get an unofficial estimate of the value of your home on zillow.com (use the “zestimate” tool). You can also look at the value of your tax assessment, but understand that home values change, so you may get a very different number when your home is formally appraised.
For our example, let’s say your home is appraised at $100,000, and you owe $70,000 on your mortgage. LTV for your home is 70,000/100,000, or 70%. Lenders may offer loans for “up to 85% of LTV.” Because your LTV is lower than 85%, you represent a lower risk to the lender, and that may qualify you for a higher loan amount and a lower interest rate. Provided you have a good credit score, an appropriate income, and you meet other eligibility requirements, you should be eligible to borrow up to $30,000.
Now that you know what second mortgages are, why would you want one?
Second mortgages are a good way to have the cash you need when you need it, often at a lower interest rate than using, for example, a credit card. At some institutions, similar loans may be referred to as “Home Improvement Loans” because borrowers use their home’s equity to increase their home’s value: a home owner might use the money to put in energy efficient windows, for example, replace an old appliance, or remodel the kitchen. Major home improvements can be expensive, so having a low-interest source of cash can help you keep costs under control.
How do I apply for a home equity loan or HELOC?
Applying is easy with Salal CU—you can even apply online! To make your application as efficient as possible, you’ll want to know the following information:
- Your home’s current value
- The amount remaining on your mortgage
- Your monthly income
Documents you’ll be asked to provide:
- Current mortgage statements (all pages, for all properties)
- A copy of the first mortgage promissory note
- Declaration page from your homeowner’s insurance provider
- Proof of income—30 days’ of pay stubs and the previous year’s W-2.
Click here for more information about Salal’s Home Equity Loan and Lines of Credit, and to access our online application.
Whatever you need cash for, a Salal Home Equity Loan or Line of Credit is a smart way to find the funds!