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A home equity loan, sometimes called a secured loan or a second mortgage, is different from a remortgage or mortgage refinance. A home equity loan is used to tap the cash that’s been accumulated in your property. The processes and the interest rate can be different for a home equity loan and a remortgage.  Equity basically means the difference between the market value of your property and the amount you owe on your mortgage.Structure of the loanWith a home equity loan you basically take out a second loan secured by your property on top of your existing mortgage if you have one.   With both a home equity load and a remortgage you put up your home as collateral for the loan.  The loan to value ratio (LV) is the percentage of the market value of your property that you can borrow against.  In the case of a home equity loan you will be repaying two different loans (your mortgage and the secured loan) and, very often, to two differnt lenders while if you go the remortgage or mortgage refinance route you take out an entirley new mortgage (from the same lender or from a different lender depending on how favourable their terms are at the time the loan is sought) to replace your existing mortgage for a higher amount and take the cash difference.  This is sometimes called a “cash-out” refinance.As an example, if the outstanding mortgage on your property is £100,000 and the value of the property is £200,000 and you take out a new mortgage or remortgage your property for £200,000 (assuming 100% financing) you will unlock £100,000 from your home and this cash will be given to you to sepnd as you deem necessary . Usually lenders use a ratio of less than 100% in working out how much they are prepared to lend to you. Normally the loan to value ratio would be somewhere between 75% to 95% or the market value of the property.  In other words the amount that you would be able to borrow against your property in this particular example would be between £175,000 to £195,000 (£100,000 would have to go to your existing lender to satisfy your obligation before the the remaining £100,000 is released to you) depending on market conditions. But 100% financing is not unheard of if the economic climate is favourable.Interest rateThe rate of interest that would be offered to you would be lower in the case of a remortgage. Home equity loans are offered by banks and financial institutions at prime lending rate which is controlled by the bank and would be higher than the rate on your mortgage.  In addition, because Banks sell the mortgage loan to investors the interest rate on mortgages is rerated to the bond market which tend to be lower.CostHome equity loans or secured loans tend to be less costly than a mortgage in the short term.  The reason is that (although interest rates are lower) the closing fee and other fees are added to a mortgage deal which you can either pay upfront or spread them over the duration of the loan. Remember that a remortgage with a cash-out is for all intents and purpose a new mortgage with all the associated costs.PaymentsWith a second mortgage or home equity loan you will either get a cash lump sum or a line of credit which you can draw upon as and when needed. So you’re  not changing your mortgage and your monthly mortgage payments remain the same but in addition to that you have a second payment for another loan. With a mortgage refinance or a remortgage you’ll be taking out an entirely new mortgage and your monthly payments might very well be different. With a home equity loan sometimes you have the option of paying only the interest for an initial period and then start making repayments on the prinicipal, ie the amount borrowed, and the interest. This way your prepayments could be kept low during the initial period. With mortgage refinance you make a brand new payment which includes the amount of the first mortgage plus the additional amount that you have borrowed so in our example above you will be making payments on £200,000 (assuming 100% financing) and, again, this could be either an interest-only mortgage or a repayment mortgage which means your monthly payments inlcude interest on the outstanding amount and a portion of the original amount borrowed.

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