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There comes a time in every
homeowner's life when they need some extra cash. Either for
debt consolidation purposes, your kid's college tuition,
remodeling that outdated kitchen, new additions to your home
or taking your spouse on a cruise for your twentieth
anniversary; any way you look at it, these things all cost
money, which you don't have. Or, you just don't think you
have. If you have owned your home for any length of time,
chances are that you have equity built up. Equity is the
difference between the value of your home and the balance of
your existing mortgage on the property. With built up equity
comes a couple of easy loan options - a home equity loan or
a home equity line of credit. But, which one is better for
me, you ask. Well, here is some basic information about each
to help you make your decision.
Home Equity Loan
A home equity loan is a second mortgage installment loan
that is based off of how much equity you have built up in
your home. Home equity loan lets you borrow a lump sum with
a fixed low interest rate and fixed payment amounts over a
fixed period. A home equity loan will help you turn what you
have put into your home into quick cash that you can use.
Borrowers should use home equity loans for life's big
expenses such as to consolidate high-interest debts, for
home additions, finance the purchase of a second home or
land, or luxury items.
Home Equity Line of Credit
A home equity line of credit, also referred to as a HELOC,
is different than a home equity loan in that you can use it
more like a credit card or checking account. You apply for a
home equity line of credit, just like a loan, but you do not
get a single sum when you are approved. Instead, you are
able to access this line of credit at any time you need it
by writing checks or using a credit card on an account given
to you by the mortgage lender. The payment terms on a home
equity line of credit is different than a home equity loan
in that a line of credit revolves each month, so when you
make a payment, it is applied to the credit and you are able
to use that credit again immediately. The down side to a
home equity line of credit is that the interest rate and
annual percentage rate (APR) move up and down on par with
the prime rate published in the Wall Street Journal, so you
are not ever locked into an interest rate. If the interest
rate goes up or down, so do your payments.
This type of loan is better for homeowners who need
fluctuating amounts of money to pay recurring monthly
expenses or smaller purchases, like home improvements,
college tuition, car repairs, or any unexpected expenses
that come up. You only pay interest on money you've used.
A Few Considerations
Remember that both of these options, home equity loan and
home equity line of credit, are both considered a second
mortgages, because they're secured by your property, just
like your first mortgage. The interest you pay on a these
loans may be tax deductible (consult your tax advisor for
details). Also, just like with any mortgage, you need to
review the terms completely before making a decision. Some
banks and mortgage lenders only offer a great interest rate
at the beginning, just like a credit card, to get you to
sign on that dotted line. Then the rate skyrockets, and you
are still left with the payments. So, consider each option
carefully, consider what you need the money for, and
research the terms of each one before you sign.
At Optionwide Home Loans, our mortgage advisors are trained
to listen to your needs and carefully assess your financial
situation. Contact us today for your free no fee, no
obligation consultation. Only then can we recommend a
customized solution that makes sense for you. |
Equal Housing
Opportunity