Effectively, Home Equity Loans are of two major types: Home Equity Loan and Home Equity Line of Credit.
One type is a lump sum fixed rate type loan based on the equity in your home. This is called a Home Equity Loan.
It’s a mortgage (second) where the principal and interest is paid back over the term of the mortgage.
Generally, Home Equity Loan mortgages can be up to 15 years in duration.
Home Equity Loans offer interest rates that will not change over the term of the mortgage
Some lenders offer Home Equity Loan amounts up to 100% of the equity in your home, subject to conditions.
The other type of Home Equity Loan is called a Home Equity Line of Credit (HELOC) which is a line of credit based on the value of your home which you can use up to a certain pre-determined amount and you repay the loan with interest within a certain time frame.
A Home Equity Line of Credit is a revolving line so you can pay off the debit and then use it again and again during the term of the credit line.
For qualified borrowers, some lenders offer Home Equity Lines of Credit amounts up to 100% of the available equity in the home.
Home Equity Lines of Credit use some sort of variable percentage rate based on the Prime Rate or some other index rates.
The rate of interest charged for Home Equity Lines of Credit periodically changes based on some interest related major recognized financial index standard.
The index used varies by lender but generally it’s the London Inter Bank Rate with is the rate available for banks on US Dollar denominate deposits in London (LIBOR), the Prime Rate, the Constant Maturity Treasuries (CMT) which are adjusted daily interest rates for a fixed maturity, One Year Treasury Bill Rate or the Cost Of Funds Index (COFI) which is a composite rate of savings, and other accounts at the Federal Home Loan Bank (FHLB). Lenders can and do use other indexes.
Generally, for most people interest expense paid on mortgage interest expense for Home Equity Loans and Home Equity Lines of Credit are tax deductible.
In addition to the rates listed above based on some index, the mortgage brokers and direct lenders can add some sort of margin, fees or additional costs to the interest rate index. This can take the form of “points”, other fees, or a “spread”.
Potential users of this type of real estate related financing product should: ask questions, check with several offering companies, take your time and compare product offering, and understand the product. Generally speaking, a Home Equity Loan or a Home Equity Line of Credit is a complex sophisticated financial instrument and users of these types of financial instruments should be conversant with and understand the terms, conditions, tax consequences and other implications of using these products.
