How It works

Home Equity Loans are very similar to traditional mortgages.

You can think of them as an additional mortgage in addition to the first one (hence, the name “second mortgage”). You receive a lump sum upfront, and pay it back over time in equal installments that include principal and interest. Interest rates are typically fixed, and lower than other debt like credit cards, and you know in advance what's the amount that you will need to pay every month. There are however strict requirements, and may be hard for many older adults to qualify. These requirements vary by lender, but typically the maximum CLTV is 80%, maximum DTI is 43%, and good credit is required. If you are wondering what DTI and CLTV are, we have a simple glossary here. Transaction costs are lower than a mortgage or Cash Out Refinance. The homeowners remain responsible for paying real estate taxes, insurance and maintenance on the home. The interest could be tax deductible if you are using the money for home repairs

 

Home Equity Loan (HEL)
Cash Amount Typically up to 80% CLTV
Cash Payout Design Upfront lump sum
Repayment Profile Constant monthly payments
Taxes, Insurance & Maintinance Responsibility of the borrower
Transaction costs Varies; typically low

WHAT TO CONSIDER

If you need to access a large amount of cash right now, and have enough income to pay the loan back comfortably, Home Equity Loans can be a good solution. Examples can be using the proceeds to take care of large unexpected repairs or healthcare bills, or consolidating high-interest debt, like credit cards. However, it's key to have enough income to safely support the higher debt payment going forward; defaulting on the debt would put you at risk of losing your home. It may be difficult for older adults to qualify because of strict requirements.