Second Mortgages and Reverse Mortgages—Borrowing Your Home’s Equity
There are a few ways you can borrow against the equity you’ve built in your own.
Home Equity Loan
A home equity loan is a loan secured by a subordinate mortgage on your principal residence. Home equity loans are most commonly referred to as second mortgages, because they’re usually in second lien position, but can be held in first or third.
A traditional home equity loan provides lump-sum proceeds at the time the loan is closed. There is a difference between a home equity loan and a home equity line of credit (HELOC) A home equity loan typically has a fixed rate, a fixed term and amortized payments, while a HELOC has a variable rate and is open ended.
Home Equity Line of Credit
A home equity line of credit (HELOC) is an open line of credit that uses your home as collateral. This is different from a home equity loan in that once a maximum loan limit has been established, the available funds can be withdrawn at the homeowner’s discretion. A HELOC is generally in second lien position, but can also be in first or occasionally third position.
A HELOC typically has a variable interest rate and often requires only a minimum monthly payment.
Home Equity Conversion Mortgages (HECM), more commonly called reverse mortgages, are available to individuals age 62 and older. The homeowner doesn’t have to repay the loan until the property is sold, vacated or the owner passes on. An HECM is a popular choice for retirees.
An HECM releases your home’s equity and convert it to available funds. The amount of the loan is based on the value of the home, the age of the borrowers and the current mortgage owed, if any.
There is a purchase HECM as well as refinance HECMs; thoroughly investigate which option is best for you.