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Solutions for home improvements and more

Using the equity in your home to make home improvements and/or pay off debt is a great way to achieve your
financial goals and dreams. Instead of refinancing your first mortgage, you may want to consider a home equity
loan solution.

Second mortgage vs. Home Equity Line of Credit (HELOC)

There are typically two types of loans that can help you access your home’s equity: a second mortgage and a
home equity line of credit. Although both options allow you to borrow money against the equity in your home,
there are several key differences.

  • Second mortgage: A second mortgage is considered an installment loan and you will receive the funds in a lump sum. The repayment term is a fixed period, typically ranging from five to 20 years. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time. The interest rate is usually fixed rather than variable. You might consider a second mortgage if you need money for a specific purpose, such as an addition to your home or to consolidate credit card debt.

  • Home Equity Line of Credit (HELOC): A Home Equity Line of Credit, also referred to as a HELOC, is a form of revolving credit. Your credit limit is usually available for a set period of time, such as 10 years, and this is known as a draw period. During the draw period, the monthly payment will typically be a percentage of the outstanding balance or a predetermined minimum amount, whichever is greater. After the draw period, you will typically have a set term, such as 15 years, to repay the remaining balance. During the repayment period, the monthly payment will typically be a percentage of the outstanding balance at the end of the draw period or a predetermined minimum amount, whichever is greater. Interest is charged on the outstanding balance. The interest rate is usually variable rather than fixed and is tied to a market rate such as the Prime Rate published in The Wall Street Journal. Check the terms when you are shopping for a HELOC because they can vary among lenders. Being able to borrow, pay back and then borrow again during the draw period without applying for another loan offers flexibility.
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Helpful tip
If you choose a variable rate loan, find out how frequently the rate can change and how much the interest rate can change over the life of the loan. Usually, there is a cap that will limit how high the rate can go.
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Other benefits
Since a second mortgage and HELOC are collateralized by your home, interest rates are usually much lower
than credit cards and personal loans. Another possible advantage is that the interest may be tax deductible.
Check with your tax advisor for details and eligibility.

Estimate your equity
To estimate the potential equity in your home, visit a real estate site such as Zillow.com. Lenders will often allow
you to borrow up to 90% of this amount minus your first mortgage balance. Here’s the formula:
 
(home value x .90) - (first mortgage balance) = available equity

This calculation will give you an idea of the equity that may be available to you, but the lender will usually obtain
an appraisal of your home’s value to make a final determination.

*Rates and terms for second mortgages and HELOCs are often determined by qualifying factors such as your income, debt and payment history.

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