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The lender already is making money on the first mortgage.
Now, he gets to make a slightly higher interest rate on the second mortgage and he still has the same house as collateral.
HELOCs have a draw period, usually five to 10 years, when you can borrow funds.
Then there is the repayment period, usually 10 to 20 years, during which the money must be repaid.
Though some lenders offer adjustable interest rates, a home equity loan typically comes with a fixed rate for the entire life of the loan, which is generally 10 to 15 years.
Borrowers tend to prefer that if they have a specific project with a fixed cost in mind, like putting a new roof on their house or financing their bucket-list trip to climb Mt. A HELOC is a pay-as-you-go proposition, much like a credit card.
They also aren’t likely to rent it to anyone who’d turn it into a meth house or indoor chicken hatchery.
Such collateral gives lenders flexibility when evaluating borrowers, but they still rely heavily on credit scores when setting the loan’s interest rate.
A HELOC’s flexibility means those things fluctuate.
For instance, if the market value of your home is 0,000, the total amount you owe would have to be less than 0,000, a sum that would include your original mortgage and the home equity loan or HELOC you are seeking.
This lowers the risk for lenders since a borrower who has at least ,000 invested in an asset is not likely to walk away from it.
A home equity loan is borrowing against the value of equity that you have in the house.
Equity is the difference between what your home is appraised at, and what you owe on it.
With a HELOC, it’s similar to a credit card: You receive an open-end line of credit and draw from that as your needs arise.