How A First Mortgage Differs From A Home Equity Loan
A first mortgage and a home equity loan are two different types of loans. A first mortgage is taken out then the home is initially purchased. A home equity loan is a loan that is given to those who already own a home and want to borrow against their equity. This way, their equity acts as collateral for the loan which means if they default on the home equity loan they could lose their house.
When it comes to obtaining a first mortgage, the borrower doesn't have any collateral other than the home itself. Therefore the amount of the loan will be determined by the value of the home. That is why it is common to require a down payment of 10% to 20% on a first mortgage. Lenders rarely finance 100% of the value of a home. If the borrower defaults on the loan then the lender will foreclose on it and sell it in order to recover his losses. First time home buyers often use the Fanny Mae program to help them buy the home. Fanny Mae helps those that don't have equity or collateral to buy homes. These are usually lower priced homes.
When it comes to obtaining a home equity loan, the lender will look at the amount that is still owed on the home and compare that against its current market value. That is what determines the home's equity. The lender may choose to finance up to 100% of the equity and use the home as collateral. In any event, if the borrower is unable to make the monthly payments, the house will still be repossessed.
In addition, when taking out a home equity loan, it is possible to do a home equity plus refinance. This option is a combination of a mortgage and cash equity loan. Instead of having the original mortgage payment along with the home equity loan payment, the refinance option will bundle the two loans into one single payment. In order to use this option, one must have a good amount of equity built up in their home. Then they simply re-mortgage their home and cash out the excess equity. This is particularly beneficial when the interest rates have lowered since the home was originally mortgaged.
Since buying a home or taking out a home equity loan usually involves large sums of money, it is a good idea to make sure the terms of the loan are fully understood before signing any paperwork. Any time money is borrowed against one's home, there is the risk of losing the home if at any time in the future it becomes impossible to keep up with the payments.