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Saturday, February 25, 2012

Studying The Differences -- Mortgage Vs Home Equity

By Chris Scarborough


Many homeowners find themselves scratching their heads and looking on with a bemused expression when asked to tell the difference between a second mortgage and home equity loan. Second mortgages are a type of home equity loan; however, home equity loans are usually termed as a line of credit. In order for anybody to maximize the heretofore accumulated equity, a homeowner would have to make the right decision; should I take out a second mortgage or a home equity loan?

It is imperative, first of all, that you know the fundamental concepts of both the second mortgage and the home equity loan.

Tale of the Tape -- Second Mortgage Vs Home Equity Loan

Second mortgages pay out a predetermined sum of money, as either a line of credit, in monthly installments or all at once. It is then paid back in a particular schedule just like the original mortgage. Dissimilar to refinancing, second mortgages do not supersede the initial mortgage.

Most of the time, a second mortgage would have a life of loan, or terms that falls between five and thirty years, with the interest rate being fixed. There would also be some congruence with original mortgage loans in the sense that both the points and interest rate are based on factors such as the house's price, the current interest rate and the individual's credit history. A second mortgage would typically have a slightly higher interest rate and slightly lower fees.

Contrary to the former, home equity loans share a lot of affinities with how a credit card works, and credit cards for purchasing may also be included. A person who has equity on a home can make use of a home equity loan if they need an extra infusion of cash.

An individual can pay these loans simultaneously or in smaller increments. Several individuals would get their monetary infusions through the line of credit, allowing them to withdraw money any time necessary. Another significant congruence with credit cards, would be the specific interest rate charged on home equity loans and the amount that can be borrowed based on the individual's repayment capacity.

The process of determining a home equity loan's limits are quite simple, as the lender has to ascertain the home's appraised value and start calculating at three fourths of aforementioned value. Thereafter, the lender would deduct the outstanding balance owed on the given mortgage.

Present financial needs would help in determining the type of loan. Wedding preparations and paying off a hospital bill are example of one-time only payments that would be best suited for a fixed-rate second mortgage.

For those who would require repeated cash disbursement on an intermittent basis, a home equity loan line of credit would be a smarter and more prudent choice on their part. A line of credit will allow homeowners to borrow money whenever the need arises, and if repayment can be made expeditiously, a good amount of money can be saved relative to second mortgages.

Furthermore, the individual's spending habits also need to be taken into account in relation to the above. If an individual who has a predilection for making frivolous purchases is handed out an additional credit card, a home equity loan line of credit could be quite a disconcerting thought to ponder.




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