Home Equity Loans can be cost cutting options for homeowners who want to consolidate bills and convert some of their "past due" into good credit. The possible tax deductions on 2nd mortgage loans make them potentially useful for debt consolidation, since other personal and consumer loans typically have no tax deductions and higher interest rates. Second mortgages are frequently used for home construction purposes, and tax deductibility may be applicable.

According to current home equity statistics from the U.S. Census, approximately 7.2 million Americans obtained home equity loans in the past year. However, not all loans are right for everyone. It is important to decide which type of home loan is the perfect fit for you. To be sure that you are making a confident financial decision before you sign on the dotted line, read on for answers to frequently asked questions (FAQ) about home equity loans.

Common Home Equity Questions:

Are Home Equity Loans & Home Equity Credit Lines one in the same?

Answer: No. Although both of these loans are of second mortgages, a HEL and a HELOC have some important differences. With a HEL, you receive a lump sum of money, while a HELOC works more like a line of credit.

The mortgage rate on these loans also works differently. Home equity loans generally have a fixed interest rate, but according to bankrate “almost always carry fees and closing costs, which many lenders do not generally charge for credit lines.” While home equity lines of credit may be free of some of these costly up-front fees, keep in mind that they are also variable rate loans, which means that the interest rate can change over time, according to the prime interest rate set by the Federal Reserve.

When choosing between these loan types, ask yourself whether receiving your loan all at once or having access to a line of credit works better for you.

What Is L.T.V (Loan-To-Value Ratio)?

Answer: The loan-to-value-ratio is the difference between the amount of your current mortgage and the newly appraised value of your home. This ratio will be figured into the loan terms of your second mortgage.

Is Mortgage Refinancing a Better Option Than a Home equity loan or HELOC?

Answer: That depends. If you decide to refinance your current mortgage, you may be able to obtain a lower interest rate, which means lower payments, and the possibility of a cash-out refinance.

Obtaining an interest-only refinance is also a possibility. However, while an interest-only lowers your payments, it can also lower the equity in your home and, says CFA for bankrate, Don Taylor, “only makes sense for people who don’t plan on being in the mortgage or house for a long time.”

If you are happy with the mortgage rate on your existing 1st mortgage, it makes be a good idea to look at second mortgage or home equity line of credit, especially since it is possible to refinance your first mortgage as well as your second in the future if interest rates do take a dip in your favor.

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