It generally works much the same way as other home equity loans. You apply to a lender for the home equity loan. The application process is usually simpler than applying for a fixed or adjustable mortgage. The lender will want to make sure there is sufficient equity in your home to secure the maximum amount of the home equity loan and that you have sufficient income to make the monthly interest payments. Once your home equity loan is approved, the lender will issue you a checkbook. You can then use these checks for home improvements, educational expenses, medical bills or whatever you want. If you use the money to improve your home and in some other situations, the interest you pay may be tax deductible.
The lender will secure the amount you borrow by a second mortgage on your home. Like the balance of the home equity line of credit, the amount of the second mortgage will fluctuate with amount of the home equity credit line actually borrowed and not with the total amount you are approved for, although there might be a notice in the chain of title that there is a home equity line of credit of potentially the approved amount.
Payments are usually billed monthly and you can pay the interest only or the interest and part or all of the home equity line of credit balance. Something to keep in mind is that at the end of the home equity line of credit term, any remaining balance will be due. If mortgage rates are favorable, and you meet the other qualifications, you might be able to refinance and roll the home equity line of credit balance into a fixed mortgage.
A home equity loan is simply a loan secured by the equity in your home. The
difference between what you owe on your home and what it is worth is your equity. Home equity loan lenders will loan you up
to 100% of that equity and sometimes up to 125% based on your income, credit score and overall ability to pay the interest and
repay the loan.
Home equity loan lenders also take into consideration what you are going to use the money for. If you are going
to use the home equity loan to finance a room addition or other improvements to your home that will increase its value, home equity
loan lenders are more willing to approve your loan than if you simply want to transfer debt from credit cards or create more debt.
Some home equity loan lenders will also look with favor on other intended uses for the home equity loan, such as starting up a
business or investing in other real estate.
A home equity loan is secured by a mortgage on your home. If your home is already mortgaged, the security will take the form of a second mortgage.
Remember, choose the term of your home equity loan carefully. If you are only paying the interest, you might be in for a nasty surprise when
the home equity loan comes due.
Assuming your home still has positive equity and your income can still cover the payments, most home equity loan
lenders will allow you to roll it over into a new home equity loan. Of course, that may be just the time to consider refinancing and combining both
your first and second mortgage into a fixed first mortgage for a fixed term.
see also: Home Equity Tax Deductions
