Definition of Equity Loans

Mortgage lending became more difficult in 2009 than ever before. Many foreclosures hit the market, property appraisals were lowered, which decreases the equity a homeowner has in his property. Equity loans are usually written as second mortgages and are actually a second lien against your home, filed behind (dated after) your first mortgage.

Equity Loan Second Mortgage

An equity loan is a second mortgage in which the amount of the loan is disbursed in one lump sum to the borrower. This loan has monthly payments that are fixed amount. The interest us usually fixed as well, and the term can run anywhere from five to 20 years, depending on the size of the loan. The funds can be used for any purpose.

HELOC Second Mortgage

The second type (and most popular) of equity loan is a line of credit which can be set up and drawn against on an as needed basis. This is a convenient way to utilize funds that are not needed all at once. An equity loan has a draw period (usually five to 10 years). During the draw period, an interest only payment can be paid. When the draw period is over, principal and interest payments must be made and no more draws can be made. The interest floats and can change with market changes. This type of second mortgage is referred to as a home equity line of credit (HELOC).

Benefits

Equity loans allow you to use the equity in your home for any purpose. Home renovation, college expenses or debt consolidation are a few of the ways you can benefit from an equity loan. If you have a really low interest rate on your first mortgage, you may choose not to lose that rate by a refinance. Taking out an equity loan gives you the funds you need with just a small payment required. With a HELOC, you are allowed to take out only the cash that is needed, and more can be accessed on an as needed basis.

Risk To The Lender

Second mortgage loans are higher risk to the lender. In a foreclosure sale, the first mortgage is resolved first, and if there is any funds left, they go to the second mortgage lender. Loan-to-value percentages were lowered during the economic downturn in 2009. In years past (with great credit), you could take out a HELOC and use up to 100 percent of your equity. Appraised Value: $300,000 First Mortgage $180,000 Equity $120,000 You are likely to see an 80 percent approval: Appraised Value $300,000 80 percent of Value $240,000 First Mortgage $180,000 Available Equity For Second Mortgage $ 60,000

Preparation

If you are considering requesting an equity loan, you need to be a "prime" (high scoring) borrower with very good credit. Go to annualcreditreport.com (See Resource) to pull all three of your credit reports to see if any negative, error or duplication has hit your report, lowering your credit scores. Dispute errors by calling the customer service number on page one of each report. For information on raising scores and credit education, visit MyFico.com (Fair Isaac Corporation, creator of credit scores official website).(See Resource) Also, check your home value. One way is to ask a real estate agent to run a "sold search" on the MLS (multi-list) system to see what similar homes have sold for in your neighborhood. These sales may be the comparables that an appraisor uses in the appraisal process. If you live in a highly populated area, go to zillow.com (See Resource) and enter your address and see what comes up as sales and "for sales" homes.