Does a Home Equity Loan Affect Your Mortgage

Often called a second mortgage, an equity loan is a sum of money you borrow against the equity of your home. In case you need to take out another loan against it, you might start to wonder, “Does a home equity loan affect your mortgage?”

Home equity loans can affect your mortgage. While taking out a home equity loan will allow you to quickly refinance, it will also keep you in debt for longer. The same way your first mortgage is secured by the property’s equity, so too is a home equity loan.

Home equity loans have fixed-rate, which means that your interest rate won’t change in case you rely on fixed monthly installments. These terms typically range from five to 30 years.

Home Equity Loans Can Affect Your Mortgage

A home equity loan is known as a fixed-rate installment loan. This loan allows you to borrow against a portion of your home equity. Mortgage loans are based on property worth, so many people wonder if a home equity loan is a mortgage and how it can affect your mortgage.

With home equity loans, you can actually refinance costly debt and cover some bigger upcoming expenses, as well as handle emergencies, among many other uses that can be very convenient.

Unfortunately, there are still some downsides when it comes to home equity loans. This is why it is important to understand how they work before pursuing one yourself.

Home Equity Loan Is Secured by the Property – The Same Way the Mortgage Is

The same way your mortgage is secured by the property, so too is the home equity loan. Equity can be defined as the current market value of the home minus the amount you owe on your mortgage loan. A home equity loan allows you to borrow money using your home as collateral. You can get a lump-sum payment and start repaying your loan with fixed-rate interest over some predetermined terms.

How Does a Home Equity Loan Work?

Equity grows as you start paying down your mortgage, as well as in case your home increases in value. This might happen if the home value on the market grows over the years.

For example, your home could be originally purchased for a sum of $225,000, and its worth could have grown to $300,000 over the past few years. This is how time and increased home values affect your home equity – this adds $75,000 to the home’s total equity. In case you have paid down your current mortgage by $25,000 so far, the total equity you own will also increase.

You might start wondering does mortgages expire and how much lenders will let you borrow. In most cases, lenders will let you borrow between 75% and 85% of the total home equity, but the mortgage can expire if your debt isn’t paid. In case you have $100,000 in equity, you might be able to borrow between $75,000 to $85,000.

Home Equity Loans Can Bring You Many Benefits

In most cases, there are many benefits to equity loans. Interest rates are often low if you compare them to credit cards and personal loans, which makes them much more attractive. Depending on the fact of how much equity you currently have, you can actually have access to a pretty large amount of money.

Another great benefit is that you can also get a tax break. How does this work? In case you use a home equity loan for improving your home, you’ll also deduct the loan interests on your taxes. You might also worry, is mortgage tax tax-deductible? The answer is no, but it can lead to a reduction in taxes.

Here are some other benefits you get to enjoy if you can afford the needed payments. Taking out a home equity loan might help you pay off:

• Uncovered medical bills,
• Dental bills,
• Legal expenses,
• Home repairs,
• Car repairs,
• Travel costs,
• Tax bills that are larger than expected.

If you need to pay off some high-interest debt such as credit cards with money you get from a low-rate equity loan, you can actually lower your expenses in total, which is great news. This still needs to be approached with caution. You can get your mortgage deed by contacting the lender and finding out more information on how this would work for you, or check out some mortgage books.

In case you have been overspending in general and don’t solve the underlying issue, this can only lead to bigger problems and rack up your balances. You could be putting your house at risk by trading unsecured debt for secured debt.

What Are Usual Closing Terms?

Closing costs usually run between 2% and 5% of the loan, so for a home equity loan of $100,000, it could cost you about $5,000. Using your home equity could keep you longer in debt, and you can get yourself in a situation where you need to make payments for many years. In case you fall behind these necessary payments, the lender has the full right to foreclose your property.

Home equity lines of credit (HELOC) work the same way as credit cards. For example, you’re allowed to withdraw as much money as you want up to the total credit limit. This can happen during the initial draw period, and it usually lasts for ten years. This gives you the flexibility of getting money when you need it. Take a look at this table to compare home equity loans and HELOCs.

Check Your Options Before Making Important Decisions

If you look at this in general, home equity is a financial tool, and you can use it to pay for some significant expenses such as a home renovation or high-interest debt consolidation. It can also be beneficial for students who can get a mortgage. This is a great choice if you need to get a large amount of cash. You might want to consider borrowing some of the equity built up in your home, but make sure to do this with great care and check out options from different lenders before signing up for the final contract.