Posted: 1 Dec '22

Is a Home Equity Mortgage Loan Right for You?

Is a Home Equity Mortgage Loan Right for You?

Besides having a roof over your head, owning a home has several other benefits. One is that your home is an asset you can use to secure a loan from any lending institution. Home equity mortgage loans allow homeowners to maximize the equity they have built in their properties to secure low-interest loans. But are these loans right for you? We have answered this question and more in the sections below. Call us today to learn more.

What are Home Equity Mortgage Loans?

Home equity mortgage loans are loans offered on top of the original mortgage. These loans use the equity you have accumulated as collateral. The rates for second mortgage loans are considerably higher compared to first mortgage loans. This is mainly because the lender perceives the loan to be high-risk. There are different home equity mortgage loans, and the right one depends on your needs. 

How Home Equity Mortgage Loans Work 

Your home equity is simply the value of your home, less the money you owe the mortgage lender. For example, if your home’s current value (after appraisal) is $600,000, but you owe the lender $250,000, your home equity is $350,000 ($600,000-$250,000). 

However, you will not get a loan based on $350,000. Most lending institutions require you to leave at least 15-25% of home equity untouched. Assuming the average value is 20%, the new calculations become:

  • 80% of the home value (to ensure you leave 20% of equity untouched) = (0.8 X 600,000 = $480,000.)
  • New equity is 80% of home value less the amount you owe the lender ($480,000 -$250,000) = $230,000.
  • The amount you can expect from the lender is $230,000 or less. 

Types of Home Equity Mortgage Loans 

With home equity loans, the lender evaluates the equity you have to decide the loan amount you can qualify. The rates can be fixed/adjustable and are payable as monthly installments. Since you get this loan as a lump sum, you can use it to secure an investment property, consolidate debts, make large purchases, etc.  

HELOC or home equity line of credit work like credit cards. Once qualified, you’ll have access to capped credit, which you can draw for a given period before the loan goes to the repayment phase. After paying off the loan, you can reset the credit limit and continue enjoying credit-card-like loan services. 

Cash-out refinance allows you to take a larger loan to pay off the existing mortgage and take out the difference in cash. Simply put, you will only have one larger mortgage instead of two loans running consecutively. This could be a great choice if you need some extra cash and want to repay only one loan with favourable terms.

Make the Right Call 

Before taking any second mortgage loan product, ensure you have a good repayment plan to avoid losing your home. Contact us if you need help analyzing the best home equity mortgage loan for your unique financial needs.