Second Mortgage / HELOC
2nd Mortgages / Home Equity Line of Credit (HELOC)
A HELOC is different from a conventional home equity loan in that you don’t have to advance the entire sum up front, but use a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. HELOC funds can be borrowed during the “draw period” (typically 5 to 25 years).
Repayment is of the amount drawn plus interest or interest only depending on the loan agreement. You can always pay more and pay the loan down and re-use the funds for the life of the draw period. The full principal amount is due at the end of the draw period, either as a lump-sum balloon payment or according to a loan amortization schedule.
Another important difference from a conventional loan is that the interest rate on a HELOC may be variable. The interest rate is generally based on an index, such as the prime rate. This means that the interest rate can change over time. The rate of the HELOC is based upon the Index + a margin and the margin is the difference between the prime rate and the interest rate the borrower will actually pay.
A HELOC is categorized as a mortgage and is secured with a Deed of Trust against the real property.
A home equity loan (sometimes abbreviated HEL) is similar to the HELOC but with one major difference – A HELOC is a line of revolving credit with an adjustable interest rate whereas a home equity loan is a onetime lump-sum loan, often with a fixed interest rate.
Home equity loans are most commonly second position liens (second trust deed), although they can be held in first position. Most home equity loans require good to excellent credit history, and reasonable loan-to-value and combined loan-to-value ratios.
Home equity loans are mortgage loans just like the HELOC and will be secured with a Deed of Trust. When considering these types of loans, you should sit down with a mortgage professional to make sure this is the right type of loan for you and your situation.
Call Theresa Springer (MLO #70667/NMLS #70667) today at 360-798-4161 to see the difference that working with an experienced home loan professional can make for you.
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