Accessing the Equity in Your Current Mortgage

Tapping into home equity by means of second mortgages and the now popular home equity line of credit (HELOC) has become quite popular in recent years. Many homeowners report that, in any given week, they can count on receiving some kind of loan solicitation in the mail. These loans are touted as providing a “quick fix,” possible tax deduction to ease a homeowner’s financial woes, not to mention, a responsible way to pay for some luxury items, as well.

What are home equity lines of credit and are they the same as the old “second mortgage”? The answer is yes and no depending with whom you speak. Because it places a second lien on the property, the HELOC is indeed a second mortgage.

However, there is an important difference between the HELOC of today and the traditional fixed-rate, one-time payout second mortgage of earlier years. HELOC interest rates most often are adjustable. Their interest rates are usually low which can lull homeowners into a false sense of security about them. It should not be forgotten that the HELOC is still a lien against the borrower’s home and, as such, represents an added risk to the borrower. The positive aspect of HELOC loans is that they still can be an accessible and helpful financial tool for the typical homeowner given the right circumstances and proper use.

The equity in the homeowner’s current mortgage is still an important asset that can be used to the homeowners advantage if put to use wisely and cautiously when needed. Here are three frequently used ways of accessing equity in the home when needed:

1) Home Equity Lie of Credit (HELOC) – May be set up and used as a revolving line of credit. It can be used like a credit card, but typically with much lower interest rates.

2) Home Equity Loan –The traditional second mortgage. A fixed rate loan that the homeowner repays in installments.

3) Cash out – Some homeowners opt to refinance, at a lower rate, and take equity out in the form of cash to use for other purposes, including paying down other debt.

Home Equity can be a powerful financial tool when used wisely. It is also a risky proposition involving most people’s largest financial asset; it should not to be tapped into without careful and informed consideration.