What is a 15-Year Home Equity Loan?
One of the benefits of owning a home is that as you pay your mortgage down, you begin to build equity. Equity is that tidy little sum that your home holds in trust for you, like a big wooden piggy bank, catching both paid-down principal and value from increasing real estate market values and inflation.
Instead of smashing through the pantry door to access it, though, you simply need to contact a banker about a home equity loan.
How Does a 15-Year Home Equity Loan Work?
When you decide it’s time to tap your equity, the process is pretty straightforward. Choosing a home equity loan means that you’ll have two mortgages instead of one, the home equity loan will take what’s called the “second position.” This means that if your home was to be sold due to non-payment, the primary mortgage (your purchase mortgage, in most cases) would be paid from the proceeds first. Then, whatever was left would be given to the provider of the secondary mortgage. Because of this precarious position, home equity loans often have a slightly higher interest rate, based on your risk as a borrower.
Otherwise, a 15-year home equity loan works exactly like your regular mortgage, except it’s set up to be paid in full in 15 years instead of 30. Often, you’ll pay your home equity loan off before your primary mortgage, but that’s ok! If you sell your home before the secondary mortgage is paid in full, your closing company will send checks to both your primary mortgage holder and your secondary mortgage holder -- no big deal.
Who is a 15 Year Home Equity Loan Really For?
Before you rush out to apply for a 15 year home equity loan, it’s important to understand what you’re getting into. These loan products won’t be ideal for everybody, or possibly even the majority of homeowners. You’ll know a 15 year home equity loan is right for your family if:
You need a single, lump sum of cash for a major project or purchase. When you go to close on your 15 year home equity loan, you’ll receive a very large check from the closing company. What you do with this money is up to you, though some uses are currently more to your favor than others. You can’t go back and get more money without refinancing, so you have to know you’re getting enough the first go.
You don’t necessarily need the interest deduction. As of 2018, your home equity loan interest may not be tax deductible unless you use it to improve your home in some significant way. If you don’t need the interest rate deduction or you don’t itemize, then it’s not a big deal either way. Feel free to go on a cruise or buy that new car!
You feel comfortable with the sudden increase in your loan payment. Unless your budget can really handle another large loan payment, do not explore a home equity loan. You feel comfortable with the sudden increase in your loan payment. Unless your budget can really handle another large loan payment, do not explore a home equity loan.
But, hey, if you’re looking to do a large home improvement project and you’ll be using your 15 year home equity loan to fund it, go for it. This is the perfect scenario for this particular type of loan. Before you know it, you’ll be enjoying your new pool, remodeled bathroom or the embarrassingly large walk-in closets in your new master suite.