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.