Nowadays it seems that lenders are offering home buyers more choices when it comes to borrowing money. From equity lines of credit to home equity loans to fixed rate home equity loans to mortgage refinancing to adjustable rate mortgages, what does it all really mean? With so many catch phrases and too few definitions lending companies are often only serving to complicate matters instead of clearing things up.
Let’s take a look at the equity line of credit versus a fixed rate home equity loan. The first question to ask is what is the difference? To begin, let’s define what a home equity loan is and how it works. If a home buyer decides to use the equity already built up in his home he may qualify for a large amount of credit with a lower interest rate when needing to borrowing money. Also, depending on the situation the borrower may be able to deduct this interest rate from his taxes since the debt is protected by the home.
A home equity line of credit is a form of credit that is extended with your home being the main source of collateral. This type of credit line is basically what is known as “revolving credit” and it can be utilized for big ticket items such as children’s education, home improvement, medical bills or just to get ahead on monthly bills and expenses. A good idea of what kind of credit you will be given is to figure roughly 75% of your home’s appraised value and then deduct the remaining balanced owed from the existing mortgage.
Of course other factors come into play when applying for this type of credit line. These include any additional outstanding debt, your financial history and your income. However, after you are approved you can borrow money up to the amount of the credit line whenever you need by using a check or credit card that has been furnished to you by the lender.
In some cases with a home equity line of credit you will be given a specific period of time in which to borrow the money. At the end of the “draw period” you might be able to renew the credit line however it is just as possible that you won’t be able to borrow any additional money. This is usually spelled outlined in the lending agreement therefore before any paperwork is signed read the fine print and ask questions. Also, be aware that you might just have to pay the money you borrowed from the home equity loan back in full at the end of the designated period.
Some lenders will offer a discounted interest rate on home equity loans, but chances are good that the lower interest rate will only apply for the first three to six months of the loan. If you opt for what is called a variable interest rate you will find that your monthly payments will change as interest rates change. If you decide to sell your house you will also be expected to pay off the home equity line you have borrowed.
Along the same lines of a home equity loan comes the fixed rate home equity loan meaning the borrower knows what the monthly payments will be and the time period of repayment. The fixed rate home equity loan is typically secured by either a first or second mortgage and the loan can be granted for up to several years or more. First Horizon Home Loans in Memphis Tenn. describes fixed rate mortgages as “featuring an unchanging interest rate, which is determined when you are approved for a mortgage and remains the same for the term of the loan.”
Remember too that there are fees involved for establishing a home equity loan so take that into consideration before making a final decision on a loan overall. The most important factor a person should take into consideration when choosing a loan program whether it be an equity line of credit, a fixed rate home equity loan or something in between depends on your financial portfolio, how you believe your finances will change within the next five years, how long you plan to keep the house you are currently living in and how secure you feel with changing your mortgage payments and increasing your debt. Do you feel more secure with the knowledge that your payments will be the same amount every month for a set number of years (fixed rate home equity loan) or that the amount can fluctuate based on interest rates and how much you borrow within your window of opportunity (equity line of credit). Either way, before securing a loan talk to a financial advisor and determine all your options before making a final decision.