How Does a Home Equity Loan Work?

Home equity loans come in a variety of guises. You might hear them referred to as a second mortgage, an equity instalment loan, or the acronym HELOAN. Whatever name they’re given, the type of finance is the same—it’s a way to borrow against the current value that you have in your home. 

There is also another way to borrow against the value of your home. This is known as a home equity line of credit (HELOC)

Unraveling the Complexities of Home Equity Loans 

• Fixed-rate vs. variable rate (AKA home equity loan vs. HELOC)
• How does a home equity loan work? Other factors…

Fixed-rate vs. variable rate (AKA home equity loan vs. HELOC) 

A home equity loan, or HELOAN, is where you borrow a lump sum against the amount of equity you have in your property. If, for example, you have a house worth $250,000 and a mortgage of $100,000, then you have $150,000 of equity.

If you borrow against this amount, you’ll typically be able to take anything up to 95% of this. You might use it for home improvements, to send a child to college, buy a vehicle, pay off other (higher interest) debts, etc. The money is made available in a one-off payment and you pay it off over the term of the loan at a fixed rate of interest. 

A HELOC is a different way of borrowing. This provides you with an open-ended line of credit against the equity. It revolves, rather like a credit card, with the amount owed going up and down as you draw against the equity and then pay it back. However, it’s important to understand that—unlike a credit card that isn’t secured on anything—a HELOC is secured against the property.

With a HELOC, the following applies: 

• The interest rate is almost always variable, not fixed (although exceptions do apply).
• You borrow as you need it—you don’t get a lump sum.
• The average HELOC agreement allows you to draw against it for 10 years, but you have 15 years to pay off the debt.
• Unlike a HELOAN, you have the option to only pay the interest during the 10 years that the credit is open. The disadvantage of this is that you’ll have a shorter period at the end to settle the balance.

How does a home equity loan work? Other factors… 

Other key differences between the two options are:

• Paying off a HELOAN ends the agreement. A HELOC remains in place for the full 10 years, even if you don’t use it.
• While HELOAN repayments and interest remain the same throughout, HELOC interest will depend on the rate available each time you draw against it. Therefore, if you access it multiple times, you may be paying different rates of interest on each borrow.
• Both types of home equity loans are considered a type of second mortgage. They will likely have higher interest rates than your primary borrowing. They are relatively easy to get because both are secured against the property. However, as with any type of borrowing, it should only be approached with caution. Defaulting on payments could lead to property foreclosure.
• It's also possible to have both a HELOAN and a HELOC at the same time—as long as you have enough equity in the property. 

Get the Answers to All Your Real Estate Borrowing Needs at BRRRR Loans 

However much online research you carry out, nothing beats talking to a true industry specialist. At BRRRR Loans, our expertise is second-to-none. We’re fast becoming the money lender of choice for real estate investors. Whatever your aspirations and whether or not you have any prior experience, we’ll more than likely be able to service your financial needs.

Find out more at  https://www.brrrr.com and call us today for a confidential, no-obligation discussion.