Home Equity Loan/2nd Mortgage???

MaryAnn_ALSeptember 28, 2004

I know this is a dumb question but, is a home equity loan the same as a second mortgage. I'm interested in a home equity loan with a fixed rate. My home will be paid for in 4 years. I would like to borrow no more than $10,000 for home improvements and cc consolidation. Since I know very little about loans of any kind, can anyone tell me if this is do-able. There is a radio ad locally for a mortgage co. and if I understand them correctly you can get a 10 or 15 yr fixed rate for 4.75% right now. They claim that it's a great time to get money out of your home for improvement, etc. but I am just wondering if those rates may only apply to larger amounts. I emailed them with questions but they responded with an application to fill out and did not address my questions. My husband checked at the credit union where our mortgage is and the rates were higher and not fixed (something like 7% and capping off at 14%). Where is the best place to shop for the best rates for a HEL. Thanks!

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Yes, a home equity loan and a second mortgage are practically the same thing. You will see lenders using both terms. Technically, a home equity loan would not have to be a second mortgage. For example, if you owned your house free and clear (no mortgage), a loan against it wouldn't be a second mortgage, but would be a first mortgage. But the key point to remember is that whichever term they use, they are placing a lien against your home which is securing the loan.

The best place to shop for this type of loan is at financial institutions where you currently do business or that are known to you. The first place to check is the mortgage company that holds your first mortgage. They often offer good deal to current customers. That's not to say that some of the lenders who advertise for customers aren't offering good deals -- some are -- but you have to look especially carefully at the closing costs and other fees with lenders who do a lot of mass market advertising. (Of course, you need to check these fees with any lender.)

Often lenders will roll the closing costs back into your loan, so that you may get a check for the $10,000 you are seeking, but you may actually be borrowing more than that. In some cases, quite a bit more.

Often a good time to get a home equity loan is when you refinance your home. If you are currently paying above market interest rates, consider refinancing and obtaining a home equity loan at the same time from the same lender you refinance with. Often in this case they'll give you a home equity loan with no additional closing costs.

As far as the rates you've been quoted, the 4.75 percent seems closer to what I see being offered around where I live.

The rates should apply to any amount of loan, not just to large amounts. In fact, many lenders will offer you a home equity line of credit instead of a straight home equity loan. Instead of giving you a check for the amount of your loan, you'll get a check book which allows you to write checks against your line of credit. This is preferable because you don't start paying interest on the money until you actually need it, and if you never need the whole $10,000 available in your credit line, you never actually borrow it. The balance on your home equity line of credit can go up and down just like a credit card balance, and you pay interest on just what you owe.

With any loan, just be sure to understand all the fees and costs associated with it. Some lenders, especially those who advertise in the mass media, try to downplay or even hide the fees, and this can mean that what looks on the surface like a good deal isn't such a good deal once you dig down and see what you're really paying.

    Bookmark   September 29, 2004 at 5:53AM
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Wow! That is great information. I've been reading bits and pieces on this site, but you put it all together for me so clearly. Thanks!
The banking institutes that I've checked with are considerably higher than this particular mortgage co. I mentioned above. I'm going to have to apply and be approved before they will give me a specific rate, apparently. Then I can decide whether to accept or not. This is a scarey decision for us as we have never done anything like this before.

    Bookmark   September 29, 2004 at 4:44PM
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May Ann AL,

You have to apply and be approved before they'll quote you a rate?

Sounds as though there's some baloney in that sandwich, girl.

Though they may not give an exact quote, most will at least give you a rough idea.

The rates that you were quoted sound high to me - but I live in another country.

It may be a good idea in terms of relative rates of interest to use a loan at regular rates to pay off your credit card balances. Credit (really "debt" cards - for they put you into debt when you use them) usually charge 4 - 6 times the rate of interest that you can arrange on a regular loan.

But when you bought the stuff, did you give any thought to possibly taking 10, 15, 20 or 25 years to pay for it/them?

Seems to me best to just buy stuff on credit card (really "debt" card, for it puts you into debt when you use it) that you expect to pay off in the near future. Do you consider it wise to pay for gasoline that you'll burn up in a week, or go on vacation that's soon over, through a dozen years or so?

Best way to use "credit" cards is to pay off the outstanding balance in full, each month.

If you don't boss your money - it'll boss you, and money makes a great servant, but a horrible master.

As I've said to many during my 20 years as a personal financial advisor (selling no financial products - no conflict of interest) "Learning how money works is an interesting hobby - that pays well".

Good wishes for wise use of your assets: no one cares about your money as much as you. But the stores all love to relieve you of it.

ole joyful

    Bookmark   September 29, 2004 at 5:24PM
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If I fear anything in this world it is living in some cheap rental. There is no way I would ever put a second loan or a new loan on a paid for home, especially for home improvement.

    Bookmark   September 29, 2004 at 11:08PM
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MaryAnn_AL, thanks, I'm glad it was helpful.

Jonesy, a person definitely needs to think carefully before taking out a second mortgage or home equity loan. In my opinion, home improvements could be a valid use of this type of money, though, if the improvements will enhance the value of the home.

The problem with credit card debt consolidation is that sometimes people move their credit card balances onto a home equity loan or line of credit and then run the card balances back up again. That's a dangerous situation. If a person is going to use a home equity loan to pay off credit cards, it's important to keep paying that balance down as fast as possible, and to absolutely be certain not to run the cards back up.

Also, anyone contemplating a home equity loan needs to realize that the balance must be paid off if they sell the house. So, if the first mortgage plus the home equity loan balance total up to not much less than the house is worth, there's a chance that they'd have to bring money to the closing in order to sell the house. That can be a serious problem.

    Bookmark   September 30, 2004 at 12:21AM
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We have added a front porch, extended the garage in the back and remodeled the kitchen. Also had two 12 X 20 decks built in the back yard. We did each job at different times when we had money for it. None of those jobs cost more than $4,000., the decks were only $2,000. which was unbelievably cheap, lucked out there.

    Bookmark   September 30, 2004 at 8:32PM
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have a friend in arrears on home loan. am considering giving her the money she needs and im told i can secure this money as a second mortgage through a solicitor. has anyone done this can you advise.

    Bookmark   May 25, 2011 at 12:17AM
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Be very careful about lending a friend money. It can ruin your relationship, especially if she can't pay you back. If she can't pay her mortgage now to the bank, what makes you think she'll be able to pay you?

You could (and certainly should) do official paperwork and secure any loan, but again, ask yourself if you're willing to foreclose on her if she doesn't pay you. And does she have sufficient equity in her home that a sale would pay off the existing loan plus you?

Very dangerous path to walk down. I wouldn't do it unless I had both money and a friend I didn't care much about, since it's likely you'll lose both.

    Bookmark   May 25, 2011 at 10:38AM
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