Home Equity Loans

Borrow only the amount you need.  If you still owe $200,000 on your $300,000 house, and your lender uses an 80 percent loan-to-value (LTV) ratio, you could borrow up to $40,000 (80 percent of your home's appraised value minus the $200,000 you still owe).  You may need the full $40,000, but remember that it requires a second mortgage payment, probably at a higher interest rate than your original mortgage, and you'll need to pay off both mortgages when you sell your house.

Do your homework when shopping for home equity lines of credit.  Terms and conditions on these flexible loans vary widely, and some do not charge an annual fee.  Compare the long term interest rates, introductory rates, and rate caps on every credit line you consider.  Look for credit lines that allow you to pay down your principal every month, instead of making interest-only payments.

When comparing home equity loans, consider both up-front and long-term costs.  The up-front costs include points, origination fees, and closing costs.  The long-term costs are the total amount of interest you can expect to pay over the life of the loan.  This amount is easy to calculate with a fixed-rate loan, using a lender-provided amortization chart.  With an adjustable loan, you will need to compare the points, annual percentage rates (APRs), lender fees, index rates, margins, and other terms and conditions.  Lenders are required by law to give you this information when you apply for the loan.

Watch out for red flags such as negative amortization, which can apply to certain types of second mortgages.  If you have an adjustable-rate loan, your monthly payment amount cannot be pre-determined.  As with any adjustable rate mortgage, you can expect your payments to increase when interest rates go up.  If your adjustable mortgage or line of credit specifies fixed payments, it means that the additional interest is added to the end of your loan, and you'll be expected to pay this extra money at the end of the loan term.  Avoid this situation by asking your lender to specify payment terms clearly before you commit.

Before you commit to a home equity loan, compare its terms and cost with the terms for refinancing your first mortgage.  Getting a second mortgage may still be the best alternative for tapping your home's value, but do consider all of your options, including refinancing.

Second mortgages, structured as home equity loan or credit line programs, may allow you to use your real estate equity for various needs.  But you do put your house at risk, so prudently consider loan amounts, rates, and terms and conditions.  Be sure you read and understand all aspects of the home financing package before committing to it.

Home Equity Loan Calculator and Resources