How Home Loan Equity Works

Home loan equity which is also known as second mortgage is describe as a loan that allows borrowers to use their equity as collateral in exchange for loan. This equity becomes a form of security or asset to the lender. In this case, the lender can choose to sell or keep the property if borrower fails to make payment. With this, you can still get based a loan based on your equity while your old mortgage loan is also in effect.

Why is home loan equity referred to as second mortgage? This is because the equity loan is added to the primary or original mortgage. With this form of loan, the equity you have on your home determine the amount you can get out of the second mortgage. The lender can hold unto your collateral when you run into default until loan is paid off.

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How does a home equity loan work

Borrowers who acquire mortgage loans (first mortgage) still have the chance to obtain another loan on top of it which is known as the equity home loan (second). A lump sum is offered to the borrower at the beginning of the loan and required to make repayment on monthly installment with fixed interest rate.

This means that the interest rate is fixed or remains the same through out the period you are required to pay off your loan. Every mortgage borrower who has a home equity qualifies and it’s also dependent on your lender.

How to qualify for this form of loan

Lenders do not take into consideration the fact that you already have a first mortgage loan. They still run other checks to make sure you qualify for the second mortgage. They review their clients based on certain factors which include credit score, equity and debt-to-income ratio.

Making payment on this form of loan

Your lender provide you with a term to finish paying off your equity loan. You will make a monthly installment of the principal amount and interest.

Home loan equity rates

A borrower’s equity loan rate will be based on certain factors such as prime rate, credit score, credit limits, lender and loan-to-value ratios. The current loan rate stand at 5.76%.