Home Equity Interest Rate vs New Home Interest Rate

When you buy a new home, you generally can get a very favorable interest rate - assuming of course that you are a good credit risk. The mortgage you get when you initially buy your house is the first mortgage, and is ideally the only one you'll need. However, there comes a time for many people when they need to get out some of the cash they have tied up in their house. In such cases, they can take a home equity loan, which allows them to borrow money against the equity or collateral they own in their home. If you do decide to take a home equity loan, you may wonder what your home equity interest rate will be.

Home Equity Interest Rate vs. Home Loan Rate

When you take out either a first mortgage or a home equity loan, your interest rate is generally going to be at a lower rate than the APR for most other types of consumer debt, such as debt on a credit card. The reason for this low rate is that the mortgage loan is less risky for the bank because they have collateral- your house. If you don't pay, the bank has means to get their money back by foreclosing on the home and selling it.

When you take a home equity loan:

• The house also acts as collateral, just like it did for your first loan. This means you have to actually have equity in the house (aka your home has to be worth more than you owe). It also means the home equity lender can force foreclosure if you stop making payments on the home equity loan, even if your first mortgage is current.
• However, because the first mortgage holder has first claim on the proceeds from the home in a foreclosure sale, there is more risk to the home equity lender that he won't get his money back if you default.

As a result, your home equity interest rate is generally going to be higher than the interest rate on the original mortgage loan.

Getting Help

To better understand your obligations and rights when it comes to mortgages, you should consult with an experienced attorney. A real estate lawyer can explain home equity loans to you and can assist you in deciding upon the best course of action in light of your situation.