July 31st, 2018 6:05 PM by Jackie A. Graves, President
Home equity loans are financial products that allow a homeowner
to borrow against the equity in his or her home. Equity is the difference
between how much the home is worth and any debts against the home, such as a
Home equity loans are a popular way to pay for big expenses such as a kitchen
remodel. Maybe your credit card bills have gotten out of control or your house
needs an expensive roof repair. If you need a large amount of cash, you may
want to consider borrowing some of the equity you have built up in your home.
equity line of credit (HELOC)
– 15 years
– 20 years
consolidation, major renovation costs
renovation costs over a number of years
There are two
types of home equity debt: a home equity loan and home equity line
of credit, also known as a HELOC. Both are sometimes referred to as
second mortgages because they are secured by the borrower’s home, just like the
original (or primary) mortgage.
the difference, and how does a home equity loan work compared with a HELOC?
equity loan is a fixed-rate installment loan where all the money is borrowed in
one lump sum at inception and repaid in even monthly payments (or installments)
over the term of the loan,” says Greg McBride, CFA, chief financial analyst for
“By contrast, a
home equity line of credit has a variable interest rate but offers a great deal
of flexibility on both the borrowing and the repayment,” says McBride. “During
the initial draw period, typically 10 years, the homeowner can borrow funds
only when they’re needed and has discretion over whether to make a minimum
interest-only payment or to pay down the balance more aggressively.”
home equity can be a good way to access cash quickly, but you should have a
good reason for doing so. Using your home as collateral to pay for a fancy
vacation is probably not a sound strategy. But spending equity money on
improvements that will raise the value of your home is smart.
of home equity money include:
many differences between home equity loans and home equity lines of credit. But
if you’re just beginning to shop around, you can prepare for both.
your credit score. If your credit score is lower than 620, it may be difficult
to qualify for a home equity loan. And the minimum credit score for a HELOC is
generally require a minimum LTV of 80 percent, or 20 percent equity in your
home. LTV ratios compare the total loan amount with the value of the property
being used as collateral. In other words, lenders want to see that you’ve paid
down 20 percent of your original mortgage.
Once you secure a home equity loan, your lender will pay out a
single lump sum. You can use the money to finance home renovations, consolidate
credit card debt, etc. Once you’ve received your loan, you have to start
repaying it. Home equity loans have a fixed interest rate. That means you’ll pay
a set amount every month for the term of the loan, whether it’s five years or
15 years. Your interest rate and terms will not change.
HELOCs are a bit more complicated. There are two phases: a draw
period and a repayment period. HELOCs typically come with a variable interest
rate, so payment amounts can change from month to month. Once you’ve secured a
HELOC, the draw period begins. You’ll be able to draw money as you need it,
when you need it. Draw periods last 10 to 15 years. During the draw period,
you’ll be making interest-only payments. After the draw period comes the
repayment period. During the repayment period, you’re paying principal and any
remaining interest. Repayment periods tend to be longer than draw periods —
anywhere between 15 and 20 years.
Will a home equity loan work better for you than a home equity
line of credit? To answer that question, consider what you plan to use the
Home equity loans are best for
consolidating higher-interest debt, such as credit cards, or making a
big-ticket purchase, McBride says, because they aren’t subject to fluctuating
interest rates. Your monthly payments remain the same throughout the life of
the loan. Eligibility criteria may be stricter for home equity loans. A home equity line
of credit, or HELOC, works more like a credit card because it
has a revolving balance. This loan is better for someone who has several large
payments due over time, like with a big home improvement project. A HELOC
allows you to borrow up to a certain amount for the life of the loan — a time
limit that is set by the lender. During that time, you can withdraw money as
you need it. As you pay off the principal, you can use the credit again.
Although a HELOC is more flexible than a home equity loan, you could end up paying
steep interest charges because of the variable rate.
With either a home equity loan or a HELOC, you’re pledging your
home as collateral, meaning if you miss loan payments
or fall too far behind, the lender could end up owning your home. Equity loans
and lines of credit often have a repayment period of 15 years, but it can be as
short as five or as long as 30 years. Even if you end up selling your house, you
have to pay off the balance of the equity loan before the title can be
Source: To view the original article click here