The difference between a home loan and a home equity loan lies mainly in that the home equity loan, also known as a second or even third mortgage, is issued at a higher interest rate. This interest rate is lower than you could expect to pay on a credit card, but it will be still higher than the original interest rate.
Use a home equity mortgage calculator to see what releasing different percentages of your equity makes to the payments required. The mortgage calculator then allows you to compare whether this is the best course of action open to you.
The alternative which may be more attractive financially is refinancing your home completely. This is where the mortgage calculator can really work for you. There are a number of options when refinancing, especially if you have a substantial amount of equity in the home. By inputting these, one at a time, into a mortgage calculator you can create a list which will allow you to clearly see which option benefits you best.
Home equity loans often seem far more attractive to the home owner than they actually are. This is because the lender is hoping to seduce you into signing your property into his hands. Find out all the details and use your mortgage calculator. See if what you calculates matches what they want you to sign for. Later you may find that it wasn't such a good idea as your home suddenly becomes under threat of foreclosure because of some contractual obligation that you hadn't fully understood.
Only in extreme circumstances should you even consider a home equity loan that completely strips your property of any value over mortgage total. Keep your payments affordable by using the mortgage calculator and always factor in an additional percent or two on the interest rate.
Refinancing your home is a major step, but as with a first mortgage this is the only claim on your property. If you take out a home equity loan instead, then you will have an additional lender who has a financial stake in your home. If you decide that you much prefer the terms on the home equity loan, and the mortgage calculator seems to bring it well within your budget, then make sure you read the small print carefully.
You need to know what the payments are for: are they just interest which will leave a large capital balance payable at a later date, for example? Make sure you can afford these additional monthly payments.
Here are a few don'ts that will help you in the long run:
- Don't lie to yourself or your mortgage calculator.
- Don't over-estimate your income under any circumstances; treat overtime money as "extra" if possible, and not part of your usual salary.
- Don't over-estimate the equity in your home in the mortgage calculator. This can lead to false hopes which your property appraiser will quickly dispel.
If you are hoping to use the released capital to make home improvements, these should add value to your property. Look into this carefully to find out approximately how much you'll be increasing your property's value before committing to either the loan or having the work carried out. Failure to carry out the work means you are still responsible for the loan, but that you have not created any new equity.