Consumption and Real Estate
Why is the interest rates on Home Equity line of credit higher than second mortgage loans?
Question : Why is the interest rates on Home Equity line of credit higher than second mortgage loans?
line of credit rates
Best answer:
Answer by cptindy
Higher risk usually less collateral more risk more interest
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#3 written by just wondering 1 year ago
With a second mortgage, the lender knows exactly how much income they will be getting, because you will be paying off a defined loan amount over a fixed period. With home equity lines of credit, you are more flexible about when or how much you borrow. You may borrow less than the full line of credit, or you may only borrow for short periods of time. You may not even borrow anything. To make such loans make financially worthwhile for lender, he needs to charge a higher interest rate.
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#7 written by ZCT 1 year ago
Because if your home is repossessed they will sell it off quick often at 80% of the value of the home to sell it quick. This will usually pay off the mortgage. Often it will not pay off loans secured on the property such as a HELOC. Therefore the latter is a greater risk to the lending institution and thus a higher interest rate is charged to offset that extra risk.
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I’m not exactly sure what you mean here, but I don’t think it’s entirely accurate.
A Home Equity Line of Credit(HELOC) is based upon the prime rate(an index) which in turn is based upon the over night Fed Funds rate. The Fed Funds rate adjusts monthly according to the Federal Reserve’s meetings (Greenspan in the past).
HELOC’s as 2nd mortgages are higher than some 2nd mortgage loans right now because the index that derives their rate(Fed Funds & Prime) is higher than several fixed 2nd mortgage indicies.
Typically, the payment for HELOC’s is interest only. To see what your payment is here’s a link to a mortgage calulatore on my real estate site: http://www.nnnstore.com/mortgagecalculator.php
The typical loan term is 30 years. To find out what your interest only payment is put in a loan term of 2400 years.
For years though, HELOC’s were even less than first mortgages with interest rates as low in the 4′s.
2nd mortgages tend to be at a higher interest rate than 1st mortgages, typically. The reason is because in the event of foreclosure there is an order for paying off liens, known as position. 1st mortgages would be paid off fully first because they are in a higher position than a second mortgage.