A home equity loan is a fully secured term loan that enables you to borrow against the earned value of the home. It is protected by a second mortgage on your home, which permits the lender to foreclose and sell your house if you default on your loan. The maximum amount you can borrow depends on this earned value.
With a home equity loan, you can typically borrow a more significant amount at a lower interest rate than an unsecured loan.
Home equity term loan takes the form of a lump sum. It can be up to 80% of the appraised value of your property, less the balance of any existing mortgage. This loan must be repaid on a fixed schedule or renewed on maturity.
Home equity line of credit
A home equity line of credit is a form of secured revolving credit. As with the home equity term loan, a mortgage is registered on the property, allowing the lender to foreclose and sell it if you cannot repay your line of credit.
This type of credit allows you to borrow money whenever you want, up to a predefined limit. As you have credit available, you can borrow continuously. Currently, the credit limit on a home equity line of credit obtained from a federally regulated financial institution cannot exceed 65% of the home’s loan value.
Home equity lines of credit have an interest rate tied to the lender’s base rate, which means the rate can fluctuate over time. However, you only pay interest on the funds used. As a result, payments vary depending on the amount borrowed and the interest rate.
Key differences between the three types of home equity loans
Advance of funds
- Reverse mortgages offer the highest degree of versatility. For example, you can receive monthly advances or choose to receive a large lump sum instead.
- Home equity lines of credit provide you access to funds through a credit card or checkbook. However, it is crucial to realize that you can only access this line of credit during a fixed funding period. As this period has expired, you must start repaying the borrowed balance.
Reimbursement
- In many Europe Countries, reverse mortgages are the solution of choice for seniors regarding deferred repayment. It means that your loan is only due in the event of a home insurance or property tax default, a move, a significant deterioration of the property, a sale of the property, or death. In most cases, the reverse mortgage is paid off from the sale of the property after the owners die. It allows seniors to live in comfort, take vacations and enjoy time with their family while they can without accumulating copious amounts of guaranteed debt.
- Home equity lines of credit are repaid based on the amount borrowed and the prevailing interest rate. With fluctuating interest rates, your monthly payments may turn out to be affordable one month and then unaffordable the following month. This repayment way is the least favorable for individuals with only a fixed income. It can be challenging for seniors to repay their debt, especially if they resort to a home equity loan option to offset a decrease in income when they retire. In addition, seniors may have difficulty demonstrating their eligibility for a home equity line of credit since it has specific income requirements. Borrowers, therefore, run the risk of losing their property to repay their loan if the lending institution suddenly decides to demand immediate repayment of the loan.
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