By Kat DeLong
Mortgages, equity lines of credit, second mortgages - these terms are often tossed around by lenders, but do you know what they really mean? It may seem like Homebuying 101, but knowing the difference between these types of loans is a crucial part of making your first home purchase or improving the one you live in right now.
A mortgage is a loan secured by some sort of real estate - it can be your primary residence or a home you purchase for an investment. Once you get the loan from your lender, you pay it off in installments over a set period of time, usually 15, 20 or 30 years. While lenders write all kinds of loans, including reverse mortgages and those that have "balloon" payments, they can be divided into two basic types:
Equity loans (also called second mortgages) are loans secured by the equity, or the amount the property is worth over and above the money owed on the mortgage. If your home is worth $200,000 and you owe $150,000 on your mortgage, you have $50,000 in equity.
You can get an equity loan as a lump-sum amount of money, and then make payments on the principal and interest of the whole amount, or you can get an equity line of credit. A line of credit is an approved amount of money that you can access by writing a check or using a credit card as you need it, so you only pay for that portion of the loan that you actually use. The payments for equity loans are based on the amount owed and the current interest rate, so they can fluctuate as the rates go up and down.
Despite what you might hear in the news, lenders are still writing mortgages and equity loans for borrowers who qualify. If you need money to buy a home or build that kitchen of your dreams, get started. RateMarketplace can help.