Shopping for a Home Equity Loan
The Standard Home Equity Loan
In a standard home equity loan, the money is loaned in a lump sum
and is to be repaid at a fixed interest rate in monthly payments
over the life of the loan.
The term or length of a home equity loan is shorter than your average
first mortgage on a home. The term on a home equity loan can be
from 3 to 15 years whereas a typical first mortgage runs from 15
to 30 years.
It is recommended that you take out the shortest term possible
that still allows you to comfortably make monthly payments. The
reason for this is the mountain of interest you will save. Compare
two home equity loans each for $30,000 at 7.5% - one has a term
of 10 years and the other has a term of 20 years. If you can pay
back the money in 10 years instead of 20, you will save yourself
more than $15,000 in interest - that is more than half of what you
are borrowing.
The interest rates on a home equity loan are higher than a mortgage.
This is because a home equity lender takes on a greater risk than
does a mortgage lender. If your house must be sold, the lender of
the first mortgage gets paid before the lender of a second mortgage
(home equity loan).
With both home equity loans and lines of credit, if the home is
sold, you must pay off the loan in full.
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