HOME Equity Loan Information - A Consumer Guide To Home Equity

Shopping for a Loan

Which home equity loan type is right for me?

How do you decide between a home equity loan, a home equity line of credit and cash-out refinancing when borrowing from your home equity? You can determine this by assessing your situation with the advantages and disadvantages of each type of loan.

There may be some situations when there is not a single clear choice – in that case you should review your options once you have specific loans offers. Your lending agent can also help review the appropriateness of specific loan types for your situation and provide detailed costs comparisons.

A home equity loan or a home equity line of credit?

A home equity loan has the following key advantages over a home equity lines of credit: home equity loans are simpler and more stable than a line of credit, the interest paid is fixed and they generally have less fees and charges.

A home equity loan is the more conservative home equity loan option than a line of credit and its simplicity and stability can give you a greater peace of mind. Home equity loans generally have a fixed interest rate and therefore fixed payments over the life of the loan. A home equity line of credit has a variable interest rate and your monthly payments will vary over the life of the loan. A home equity line of credit also gives you the option of making minimum payments on the outstanding amount – the option to make minimum payments can really increase the interest you will pay over the life of the loan.

Making minimum monthly payments or even partial payments that do not fully pay off the home equity line of credit during the life span of the loan creates a ‘balloon’ payment – a large sum owed at the end. This situation is entirely avoided in a home equity loan without a balloon payment option where you must make fixed monthly payments that pay off the loan in full.

Home equity loans are free of many charges and fees common to home equity lines of credit. These fees include transaction fees, continuing costs (annual membership or participation fees) and inactivity fees. With a term loan you do not have to worry about a minimum or maximum withdrawal amounts as you do with home equity lines of credit.

A situation you want to very much avoid is taking out a home equity line of credit for purposes of debt consolidation – absolutely use a home equity loan instead. If you are using your home equity to pay off debt, this may be a sign that you lack financial discipline. A home equity line of credit works very much like a credit card – the reason you are likely in debt in the first place. The minimum payment option in a home equity line of credit is not conducive to debt management and can leave you with a dangerous balloon payment at the end of your loan.

So what situations call for a home equity line of credit? A line of credit is the right choice when you need to access money at intervals or you do not know exactly how much money you will need. College tuition payments over the next four years is an example where money is needed at intervals. An open-ended repair or home improvement job on your home that spans a long period of time is an example where you may not know exactly how much money you will need. In both of these situations, you benefit by using the money only when it is needed.

Home equity lines of credit generally have a lower interest rate than home equity loans. Home equity lines of credit are also a good choice if you are borrowing a small amount and you know you will be paying it back quickly.

A home equity loan or cash-out refinancing?

Refinancing has the advantage of a lower interest than a home equity loan but it has the disadvantage of having higher closing costs. A home equity loan generally has a shorter term than refinancing a mortgage – this can favor home equity loans if the shorter term results in less interest paid. Refinancing usually takes a few weeks longer to close than a home equity loan.

You should only consider refinancing if your refinancing interest rate is lower than your current mortgage. The lower refinancing interest rate will lower your monthly payments. The savings in lower monthly payments will have to recover the money spent in the closing costs of refinancing before you sell your home. If this is not the case, refinancing is not for you.

The Basics
Shopping for a Loan
Cash-out Refinancing
Which home equity loan type is right for me?
Understanding your credit rating
Loan Costs
Closing the deal

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The Don'ts

What You Must Know

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