How Does An Equity Loan Work?

An equity loan, also known as a home equity loan, or second mortgage, is a type of consumer debt. It allows homeowners to borrow from banks or mortgage brokers on the basis of the equity in their homes. It is simple math; the difference between the home’s market value, and the balance mortgage payment due, is what the loan amount is based on. Home equity loans with North East mortgage come in a lump sum to the borrower and/or homeowner. Equity loans typically come at a fixed rate, whereas home equity lines of credit (HELOCs) have rates that are variable.

How It Works

An equity loan is similar to a mortgage. Therefore, it is also known as or called a second mortgage. The amount allowed to be borrowed is always based on approximately 85% of the CLTV ratio of the home’s appraised value.

Repayment Terms

Standard equity loans have a repayment term that is set in stone. Regular, fixed payments are made by the borrower to pay off the loan at a conventional interest rate. If the borrower fails to repay, their home is sold.

Cash Money

An equity loan is an easy way to convert your home’s equity into cash. However, this entails putting your home on the line, which is a risky endeavor at best. You might want to consider it carefully before pursuing it.

Relocation Difficulties

If you want to relocate, then an equity loan may not be the best option for you. Often, people end up losing money on the sale of their homes and/or are unable to move. It’s crucial to weigh your options.

Compare Rates

Before pursuing your equity loan, it is advisable to compare the rates to other loan types. A second option for you, in this case, would be a cash-out refinance. There is much less risk involved in that, and it is worth considering.

In conclusion, a home equity loan, while being a suitable option for many, is a risky process to undertake at best. Weighing your options with other loan plans, comparing rates, considering relocation plans, etc., are all advisable options to think about before you decide to pursue a home equity loan. This type of loan became very popular after the Tax Reform Act of 1986 because the act eliminated deductions on interest rates on most consumer purchases. The Tax Cuts and Jobs Act of 2017, however, suspended the deduction of interest paid on these loans – something to be very mindful of. 

News Reporter