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What is the difference between a traditional second mortgage and a home equity line of credit?
Both traditional seconds as well as home equity lines of credit are technically considered second mortgages. With a traditional second mortgage, the rate is typically fixed and all funds are paid out at closing. The term of the mortgage could be anywhere from 15 to 30 years. With a Home Equity line of credit, as the name implies, the funds are drawn from a credit line account as needed and not paid out in a lump sum at closing. The rate on the credit line is typically an adjustable (usually tied to the prime rate index) and the term can be anywhere from 15 to 30 years. Home equity lines have a draw period, typically occurring in the first 10-15 years, with the remaining term on the loan referred to as the repayment period.

How do I determine which type of secondary home equity financing is best for me?
A reasonable guide for making this decision is to evaluate your intended use for the funds. If you have a pre-determined expense that will require a lump sum or fixed payment (i.e. major home improvements for which you have a written estimate) then you may prefer a traditional second mortgage with rate and term that are fixed for the life of the loan. Conversely, if you have a stream of undetermined expenses (i.e. misc. home improvements, misc. consumer purchases) then you may prefer the check writing convenience of a home equity line. With a home equity line of credit, you pay interest only on the funds you use or need, therefore with unforeseen expenses this may be the most cost-effective approach.

Will an appraisal of my property be required when I apply (even if I've had my property appraised within the last year)?
Yes, the property is the collateral for the loan and therefore some type of appraisal will be performed. Although how extensive an appraisal required can vary from one lender to another and could depend on the amount of equity in the property at closing. Some lenders may request a simple in house "computer appraisal" (a computer search of recent comparable sales in the neighborhood), others may request that a complete appraisal be performed by a fee appraiser. Generally an appraisal is valid for a period of 90 to 120 days.

Once my home equity line has closed, what if I find I needed a bigger loan?
Unless your personal banker has provided your home equity line, it is likely that you will need to re-apply for a loan if you plan to exceed the maximum terms of the existing loan agreement. However, this process could be streamlined if the lender already has much of your documentation on file.

What are the typical terms of a traditional second mortgage?
A traditional second mortgage has a fixed rate of interest with equal monthly payments applied over the life of the loan. The rate of interest is determined by a borrower's equity and credit and is usually a few percentage points higher than rates on first mortgages. The typical loan term typically ranges between 15 to 30 years.

Can I use the proceeds of the home equity loan for any purpose I choose, such as the purchase of an automobile?
Typically the funds can be used for any purpose a borrower chooses. Please see our link to the IRS website, also consult with your tax professional.

When making improvements to my home, is it wise to first consult with my real estate agent?
In a buyer's market (many sellers, too few buyers) a homeowner should be particularly careful to avoid making improvements to their property that cannot be recouped or recovered at sale. The best way to prevent making an over improvement to a property is to consult with your local real estate agent to be certain that your investment in improving your home is commensurate with what other homeowner's in your area are doing. This way you can avoid making improvements that you will not be reimbursed for if and when you decide to sell.

In a seller's market (many buyers, too few sellers) excessive over improvements could be viewed as advantageous and the risk of non-recovery reduced. There are also homeowners who want to improve their property only for their own comfort and pleasure and are not concerned with recouping this added investment when they do sell it.