Is A Mortgage Equity Loan Right For Your Needs?

By Michael VanDeMar

There may be times in your life where you find the need for more operating cash than you happen to have on hand. It could be for a child's college tuition, to help settle some credit card debt that may have gotten out of hand, or simply to refurnish your house. In such cases, depending on the current market and other various factors, an unsecured loan may not be ideal, or even an option, for many people. The mortgage rate for an unsecured loan is usually higher than that of a loan obtained using collateral, meaning that the cost for repaying the loan will be more. Additionally, the credit requirements for unsecured loans are stricter than other types of loans, since there is a greater risk assumed by the lending institutions. For homeowners who have owned their homes for some period of time, and therefore built up some equity in their houses, there is an alternative: getting a mortgage equity loan.

Equity is the difference of the market value of a home, minus any liens against it. For instance, if your house has a current market value (which can differ from your tax assessed value) of $120,000, and you have a single mortgage on which you owe a balance of $70,000, then you would have $50,000 of equity built up in your home. This equity can be borrowed against in the form of a mortgage equity loan.

Sometimes called a home equity loan, or second mortgage, a mortgage equity loan is in many respects very similar to a first mortgage that is taken out to secure the property initially. Often times there will be appraisal or application fees, and other closing costs commonly associated with getting a mortgage. In some cases the interest from the second mortgage will also be tax deductible, as can happen with a first mortgage. One major difference, however, is that the borrowers credit rating will usually be less of a consideration on an equity based loan, making them easier to acquire.

Careful consideration should be taken when making the decision if a mortgage equity loan is right for you. Your property is being used as collateral, and becoming too far delinquent in the monthly payments can lead to the loss of your house. This is especially important to keep in mind when using this type of loan to clear up debt that has gotten out of hand. If the loan is used to pay off all creditors, and the debt slate is wiped clean, then the temptation to use the newfound available credit may lead to problems. Some people have found themselves within a year right back where they started from, only this time with an additional mortgage payment on their hands. If the equity loan is being used to clear up debt that had become unmanageable, then special care should be taken to assure that the situation does not repeat itself.