Second Mortgage/Equity Loan
A second mortgage is also known as an Equity Loan as it uses your home equity as collateral. It will be in second lien position on title to a first mortgage. It will have a fixed payback term (perhaps 15 years) and generally a fixed rate and payment. Not many lenders offer a true Equity Loan. With those who do, the rates are going to be higher than what you will find with a first mortgage loan. They are a different product altogether. Seconds are similar to consumer loans (auto, boat, etc.) and are not sold on the secondary market. They are generally smaller amounts where the lenders are not making much profit so they charge a higher rate to make up for the lack.
Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit will be in second lien position to your first mortgage. The line amount can be up to 80-90% of the appraised value of the home (varying factors dictate).
Payments are interest-only based on the PRIME rate (set by the Feds) plus a Margin (set by the lender). The Margin will be fixed for the life of the HELOC.
Example of how the rate can adjust over 12 months if the Lender sets the Margin at 1.0%:
| Margin | PRIME Rate | Fully Indexed Rate | |
| 1.0 | 5.0 | = | 6.0% |
| 1.0 | 5.125 | = | 6.125% |
| 1.0 | 5.125 | = | 6.125% |
| 1.0 | 5.25 | = | 6.25% |
| 1.0 | 5.25 | = | 6.25% |
| 1.0 | 5.25 | = | 6.25% |
| 1.0 | 5.375 | = | 6.375% |
| 1.0 | 5.375 | = | 6.375% |
| 1.0 | 5.25 | = | 6.25% |
| 1.0 | 5.50 | = | 6.50% |
| 1.0 | 5.50 | = | 6.50% |
As you can see, the Margin never changes. Your total rate is the Fully Indexed rate which is the Margin plus the current Prime rate. That rate is fixed for the month until your next statement arrives showing the next month’s fully indexed rate.
Your interest-only minimum required payment will be your line balance times the fully indexed rate divided by twelve (this is a general way to calculate the payment).
Example with a $100,000 line with the first month of 6.0% rate, the interest only payment will be $500.
The Prime rate adjusts as the Fed chooses. This has the potential to adjust monthly. The rate will change as the PRIME rate changes. Your payment will recalculate based on the fully-indexed rate (Margin plus PRIME) and whatever the balance of your line is. You can pay toward principal at any time as much or as little as you like. Or you can just make the interest only required payment. If so, your balance will not reduce.
Once the line is paid to zero, you can keep the line and use it again, keep it open with no balance OR you can close the line. It is similar to how a credit card works…use, pay, use again. There is generally an annual fee starting the second year (est $75-85).
Current PRIME rate is 5.0% (revision by the Feds as of Jun 2018)
Brief history of the PRIME RATE over the past three years:
4.75% March 2018
4.50% December 2017
4.25% June 2017
4.0% March 2017
3.75% December 2016
3.50% December 2015