Home equity loans and HELOCs use your home’s value (aka. Equity), the difference between your home’s value and your mortgage balance. As the loans are secured against this difference in value. Home equity loans (HELOC) offer extremely competitive interest rates—usually close to those of first mortgages. Compared with unsecured borrowing sources, such as credit cards, you will be paying less in financing fees for the same loan amount.
The negative to these loans are that Home equity lenders place a second lien (loan) on your home, giving them rights to your home along with the first mortgage lien if stop making payments. The more you borrow against your house or condo, the more you’re putting yourself at risk or potentially up-side down.
Let’s suppose you’re working with a bank that offers a maximum CLTV ratio of 80%, and your home is worth $300,000. If you currently owe $150,000 on your first mortgage, you may qualify to borrow an additional $90,000 in the form of a home equity loan or HELOC ($300,000 x 0.80 = $240,000 – $150,000 = $90,000).