Home Equity loans
Home equity loans can be a very useful tool if used right. A home equity loan could help finance a new addition, a new kitchen or possibly pay for your child’s college education. In brief a home equity loan lets you use the equity in you house as collateral for the loan.
There are a few types of home equity loans. One type of loan that borrows on your homes equity is a traditional home equity loan or sometimes called a second mortgage. When you take out a traditional home equity loan you are borrowing a fixed amount of money from the lender. With this type of loan you pay back the loan over a fixed period of time with a fixed interest rate. Mostly the length of a home equity loan will be less then your first mortgage, though it can be any where from five to 30 years.
A traditional home equity loan is great when you know exactly how much money you need to borrow. If you have a project like a new addition to your house and have a firm idea of the cost of the project a traditional home equity loan maybe for you.
Like with other types of equity plans, the interest on a home equity loan may be tax deductible up to $100,000
Home Equity Line of Credit or HELOC.
If you’re not sure of the total cost of a project or there may be on going expenses, you should consider another type of home equity loan. This would be a home equity line of credit or HELOC. This type of lone is similar to a home equity loan in that you use the equity in your house as collateral. The big difference between a home equity loan and home equity line of credit is that in a home equity line of credit you receive a line of credit and not a lump sum of money.
A home equity line of credit is set up like a credit card. You receive a line of credit and then borrow money when you need it. The bank may give you checks or a credit card so you can borrow as you need too. Lenders determine the amount of credit by looking at the amount of equity you have in your home, your income, credit history, expenses and other debts.
Like home equity loans HELOC’s have a fixed time frame though it is a little different then a home equity loan. With a HELOC there are generally two phases. The first phase, maybe five years, is when you can borrow money via your checks or credit card. Different loans have different guide lines and rules. In a lot of cases lenders will set a minimum amount that you can borrow at one time. Like a credit card HELOC’s have a set limit to what you can borrow. Once you hit that limit you can not borrow more money until you pay off some of the out standing debt.
The second phase is one in which you stop borrowing money and pay off what you have borrowed. Loan terms vary widely. Some plans will allow you to renew your line of credit at the end of the first phase. Other loan terms will require the repayment of the loan. The repayment of the loan is usually done over another fixed period of time and works more like paying back a traditional loan. Some times the loan terms will allow you to transfer or roll over the debt to a traditional loan at the end of the first phase.
Due to the differences between home equity lines of credit you need to look them over carefully and find one that meets your needs. As when taking out any type of loan make sure you do a good deal of comparison shopping before you make a deal. When comparing loans make sure you look at the APR or Annual percentage rate. You should also look at the closing cost on the loan. When looking at home lines of credit you should look to see if there are transaction fees. These fees can add up over time. When you are comparing closing costs, other fees, and transaction fees you should always remember that you may be able to get the lender to drop a fee or change their terms.
A major consideration when deciding if you should take out a home equity line of credit is the terms of the two phases. You should ask your self, will you be able to make payments towards the interest during the first phase? This will save a good deal of money and make the second phase the repayment phase more bearable. Is the second phase too short? Ask yourself if you will be able repay the debt in the allotted time. Remember the short the repayment period the larger your monthly payments.
You should also honestly ask your self in having that much credit is a good thing. If you feel that you maybe too tempted to use it unwisely or go on a spending binge then a home equity line of credit may not be for you. Though, if you are going to need to make payments in installments such as to a contractor or to pay for college tuition then a home equity line of credit may be right for you.
© 2007 Scottie Watts