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Home Equity Loan

  • Typically a fixed loan that is taken out after the initial first mortgage is obtains.
  • Most desirable when the first mortgage was obtained durning times of lower interest rates in order to keep the benefits on the majority of the outstanding loan balance.

Compared to the Home Equity Line, the fixed rate (although higher) is a more stable payment due to the fix rate and fix amortization payment

Rate tends to be quite a bit higher than the going rate for a “first position” mortgage due to added risk to the bank.

Home Equity Line of Credit

  • Works like a credit card using the equity in your home as collateral
  • Normally a variable interest rate using the prime rate as the index
  • Most are set up with a 10 year draw period(ie credit card draw and payback period) followed by a 20 year payback period(no more ability to draw the line of credit)
  • Same idea as a credit card but due to the collateral, high credit limit tends to be higher than you can get with a credit card and interest rates tend to be lower than a typical credit card
  • Great loan to have for a “rainy day” as you only pay interest on what you are currently borrowing
  • Normally during the initial draw period your minimum payment is interest only and if you make that payment, your principle will not decrease
  • Once the initial draw period is over the minimum payment tends to go up drastically because you are going from an interest only payment to a fully amortized loan payment
  • Some banks have a yearly fee to keep the line active even if there is a $0 balance.

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