UNDERSTANDING YOUR HOME EQUITY LOAN OPTIONS
Most homeowners have some amount of equity in their homes. Your equity is the difference between your home’s value and the balance you owe on your mortgage. The equity in most homes increases over time as the home’s value increases while the mortgage balance gets paid down. Many times, borrowing against this equity allows for larger loans, lower payments, better interest rates, or all three. Knowing which factor (amount, payment, or rate) is most important to you can guide you to the best option. Home Equity Loans have traditionally come in two types: Home Equity Lines of Credit (HELOCs) or Fixed-rate/Fixed-term Home Equity Loans.
Home Equity Lines of Credit (HELOCs)
The biggest advantages of HELOCs are that you can borrow against the Line of Credit, repay it, and borrow again, multiple times during the term of the loan. You only pay interest on the amount of the credit line you use, and the payments are usually lower.
Fixed-rate/Fixed-term Home Equity Loans
Fixed-rate/Fixed-term Home Equity Loans, or second mortgages as we call them, offer a known interest rate and payment that pays the balance down to zero during the term of the loan. However, you only get to borrow one time at the beginning of the loan, so if your plans change you’ll have to refinance and get an entirely new loan. And the monthly payment is usually higher.
IF YOU'RE LOOKING FOR FLEXIBILITY, A HELOC IS A GREAT OPTION
Once the line-of-credit is established, you can borrow as much or as little as you like. You don't have to know your exact plans when you get the loan. And you can use the HELOC for one purpose, like consolidating high-interest credit cards, pay that back, then use the HELOC again to remodel the kitchen.
