Home Equity Loans

Home equity loans are loans against the equity in a homeowner’s property. There are two financing options for home equity loans:

1
fixed-rate loans
2
loans that work like a line of credit

Fixed Rate Home Equity Loans

Fixed-rate home equity loans have a fixed rate and a fixed term, which is usually a 15-year maximum loan term. All proceeds are received at the closing and the loan is fully amortized.

Home Equity Line of Credit Loans

Also referred to as HELOC, these loans are a revolving account that’s secured by the equity in the property. Funds are only drawn on an as-needed basis, up to the maximum line of credit. The interest rate on the loan will vary when the index varies because the loan being tied to the prime market index. The loan will fully amortize when the payment period has expired.

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Option ARM Home Equity Loans

A less popular option for home equity loans, the Option ARM includes a feature that allows the borrower to make payments that don’t cover the loan interest. Also known as negative amortization or deferred interest, the mortgage balance increases due to the reduced monthly payment. Borrowers can make payments through; negative amortization; interest-only; fully-amortized 30-year payment, or; fully-amortized 15-year payment.

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Types of Home Equity Loans:

When considering qualifying for the FHA reverse mortgage program, you must meet the following requirements:

Reverse Mortgage - In general, a reverse mortgage works best for those who need a long-term, steady source of income. The reverse mortgage program that’s federally insured by the FHA is the HECM program.
HELOC - A Home Equity Line of Credit is best for those who need short-term cash that can be repaid.

HELOC vs. HECM

Differences between a home equity line of credit (HELOC) and a home equity conversion mortgage (HECM)

HELOC

  • Annual Fees
  • Prepayment Penalties*
  • Not Insured by FHA
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HECM

  • No Annual Fees
  • No Prepayment Penalties*
  • Insured by FHA
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