Mortgage refinancing (read more about mortgage refinance rates) can make good sense if you want to make improvements on the house, pay those college fees, or pay-down higher-interest loans. Richard Syron, CEO and Chairman of the Federal Home Loan Mortgage Corporation — or ‘Freddie Mac’ — says “more than a dozen years of sustained growth in housing prices have turned many middle class homeowners into millionaires; put countless children through college; and made the family home the most valuable egg in the American nest”. Maybe we can’t all be millionaires but, even so, “for the typical family, home equity accounts for the bulk of their wealth,” agrees Frank Nothaft, chief economist at Freddie Mac.

For a start, you’re comparing apples and oranges —they’re different breeds of loan, and the interest rates reflect the different features offered by each. But how, exactly, are those interest rates set? Frank Nothaft explains that “home equity loans are typically linked to the prime rate … many home equity loans have rates that are 1 percent or more above the prime rate” and, by comparison, “most 30-year first mortgages are typically below prime”. The interest rate for a typical home equity loan needs to take several factors into account: the risks to the lender, the duration of the loan, the flexibility offered to the borrower, and the amount of the loan in relation to the amount of equity available (referred to as the Loan to Value (LTV).

When you got your first mortgage you put your home up as collateral against the loan. If you can’t make the payments, the mortgage company can proceed with a collection action — in a worst-case scenario, you lose the house to pay off the loan. And, because it’s the primary loan, your first mortgage has priority in any collection action. Essentially, the mortgage company is confident that they’ll get their money back if you default. For a second mortgage, the situation’s different: whether it’s a conventional repayment mortgage or a line of credit (or any other kind of loan), it’s second in line if things go wrong. So that’s a bit more of a risk to the mortgage company, particularly if the value of your house depreciates, or you take out yet more loans.

The term, or duration, of a home equity loan is usually far less than that of a first mortgage. A standard home equity loan is effectively a second mortgage (more 2nd mortgage rates), and can be a fixed or adjustable rate mortgage. The money is loaned in one lump sum, and payments are made over a pre-arranged duration — just like a first mortgage. But a home equity loan is typically for a short term, possibly only for a few years. Usually it’s for a specific purpose — home improvements, or paying of a debt — and the higher interest rate means most people prefer to pay it off as soon as they can, rather than mount up large amounts of interest. The mortgage company doesn’t have your custom for the long-haul, and it takes this into account when setting the interest rate.

Even so, this kind of mortgage can be far cheaper than the interest rates on credit cards or unsecured loans. As interest rates rise, pushed up by the Federal Reserve’s successive increases in the prime or ‘index’ rate, more and more borrowers are seeing the value of fixed-rate home equity options, in the 10-15 year range. Although these still have higher interest rates than first mortgages, homeowners have the best of both worlds: the comfort of knowing the rate won’t rise, and the ability to improve their quality of life by releasing the equity in their home.

With the other kind of home equity loan, the line of credit, you can draw cash whenever you want, up to your limit. When you pay money back, that credit is released again for you to use, immediately. In that sense it’s an “open account”, a bit like having a credit card, but with lower interest rates. This freedom to dip in and out of the loan can be a boon for the homeowner, who only pays interest on the amount owed, and nothing more — but it is more unpredictable, and less lucrative, for the mortgage company. So you pay that bit more for the flexibility of being able to use the loan as you wish, and that comes in the form of a higher interest rate.

Don Taylor, of Bankrate.com, agrees, saying that a home equity loan, or a home equity line of credit (HELOC) can “allow you to restructure your debts or finance something that’s important to you,” and adds that both kinds of loan typically have much lower closing costs than a first mortgage.

Find Best Home Equity Loan Interest Rates
When people think about applying for a home equity loan, lowest rates is the main thing they should pay their attention to because these rates will determine the amount of money they will have to repay each month.

Home Equity Loan Amount
After you own your house for at least a couple of years a home equity builds up. Even though it might be quite appealing to get the maximum cash on your home equity loan, it is not always required. If you need just few thousand dollars for one reason or another, you do not have to apply for all the money available for your home equity loan at the moment.
Keep in mind that the smaller the sum is, the more chances you have to get lowest rates on home equity loan. Two different types of home equity loans: Adjustable Rate and Flexible Rate Home Equity Loan.

When people are trying to get the lowest rates on home equity loan they can find, they might decide to select an adjustable rate plan. At first adjustable rate home equity loans are offering very small starting rates that can stay the same for a while. Fixed rate home equity loans however is a better solution and most homeowners will go for it. Even though the rates will be a bit higher than for adjustable rates, they will remain the same during the whole repayment period. This will give you a great benefit of predictable monthly payments and will ensure your financial stability.
by Victoria Munro