If you own a house – or if you have a mortgage on a home and you owe less money than the house is worth – there are a couple of ways you can convert that mortgage into money.
One way is a home equity loan. The second is a credit on the liquid value of the home -also known as a home equity line of credit.
The net value you have in your home is the current value of your home minus what you owe on the mortgage debt and any other lien against your property. In the mortgage with a bank, a loan company or a credit union, this value is not liquid, which means that it can not be sold as a commodity.
But banks and other institutions will lend you money guaranteed with that value as long as you agree to put your house as collateral for the loan. The more net value you have released in the home-the value of the original advance plus any part of the principal of the mortgage you paid, plus the amount that the property has appreciated over time-more money you can ask for.
Both offer a way to finance a variety of objectives – university authorization, housing restoration, debt consolidation, etc. – using the house as collateral.
Both offer reasonable interest rates.
Both require that you have a good credit score as well as net worth in the home.
And both impose the same primary costs or refinancing, including the valuation of the property, the rates of the search for ownership and insurance, as well as all the usual costs.
Here’s the difference: a home equity loan, sometimes called a second mortgage, is a one-time loan that is settled in a fixed amount of time. It has a defined number of payments and usually a fixed interest rate.
Like any type of credit with an established end, it provides a specific amount of money to finance a specific objective in a specific period of time. Funds lent by a traditional mortgage-backed loan begin accruing interest immediately after it is disbursed.
It looks a lot like a normal line of credit, with one big exception: it’s guaranteed by your home.
A credit on the liquid value of the home is a deposit of available money that you can take out when you need it, in what is known as a withdrawal period. You can access the money by issuing a check or by charging it to a credit or a credit card.
The biggest advantage of a home equity loan over a home equity loan is that you pay interest only on what you have actually borrowed.
A potential disadvantage is that a credit on the liquid value of the home has a generally variable interest rate. This means that your monthly payments will vary, and monthly payments on the same balance may be higher if interest rates have risen stealthily or have jumped.
At the end of the withdrawal period, you can not borrow the money and you will have to return the outstanding balance.
Also, unlike the home equity loan, a credit on the home equity is subject to periodic reviews and can be reduced or eliminated by the lender due to several reasons.