April 21st, 2018 9:17 AM by Jackie A. Graves, President
are two types of home equity loans: term, or closed-end loans, and lines of
are sometimes referred to as second mortgages, because they’re secured by your
property, just like your original (first) mortgage.
equity loans and lines of credit are usually for a shorter term than first
mortgages. The most common type of mortgages runs 30 years, while equity loans
typically have a life of five to 15 years.
home equity loan, sometimes called a term loan, is a one-time lump sum that is
paid off over a set amount of time, with a fixed interest rate and the same
payments each month. Once you get the money, you cannot borrow further from the
loan. To see current home equity loan rates, use Bankrate’s home equity loan rates tables.
home equity line of credit (HELOC) works more like a credit card. You are
allowed to borrow up to a certain amount for the life of the loan — a time
limit set by the lender. During that time you can withdraw money as you need
it. As you pay off the principal, your credit revolves and you can use it
again. Let’s say you have a $10,000 line of credit. You borrow $5,000, but then
pay back $3,000 toward the principal. You now have $8,000 in available credit.
This gives you more flexibility than a fixed-rate home equity loan.
lines have a variable interest rate that fluctuates over the life of the loan.
Payments will vary depending on the interest rate and how much credit you have
used. When the life span of a line of credit has expired everything must be
paid off. A lender may or may not allow a renewal. To see current home equity
line of credit rates, use Bankrate’s home equity line of credit rates tables.
of credit are accessed by specially issued checks or a credit card. Lenders
often require you to take an initial advance when you set up the loan, withdraw
a minimum amount each time you dip into it and keep a minimum amount
institutions negotiate a home equity loan just like they do a mortgage: You
have to pay off the loan or line of credit when you sell the house.
type should you choose?
answer to this question is seldom black and white.
there are some scenarios where the choice is obvious. For example, let’s say
you need $7,000 to pay for your daughter’s wedding next month and $3,000 to fix
your roof, which will take a week. You know exactly how much you need and both
amounts are due in full fairly quickly. If you don’t have plans to borrow
again, a straight home equity loan for $10,000 is more suited to your purpose.
if you need money over a staggered period of time — for example, at the
beginning of each semester for the next four years to pay for Jimmy’s schooling
or for a remodeling project that will take three years to finish — a line of
credit is the better choice. It gives you the flexibility to borrow only the
amount you need, when you need it.
if you borrow relatively small amounts and pay back the principal quickly, a
line of credit can cost less than a home equity loan.
card debt consolidation
who have run up credit card debt will often borrow a lump sum and pay off their
Visa, MasterCard and department store charges, then pay back the bank over time
at a lower interest rate than the cards would have imposed. This sort of debt
consolidation is the single most-popular reason people have for taking out home
equity loans, and fixed-rate home equity loans are used slightly more often for
this purpose lines of credit.
To help you determine which
loan best suits your needs, ask yourself:
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