Home equity loans are a popular way to get cash, but did you know that there are two ways of getting cash out of your home equity? The first way is through a standard home equity loan and the second way is through a home equity line of credit. They are not the same and choosing one over the other is something homeowners should think about before making their choice.
A standard home equity loan may be called by several names including a term loan, a closed-end loan, or a second mortgage installment loan. With this type of loan, you receive your money in one lump sum and the interest rate is usually fixed. This means that you pay a certain monthly payment that does not vary over the course of the secured loan.
An example of how this might work would be a home equity loan for $30,000 with an interest rate of 7.5% for a ten year period. In this case, you would pay the money back in monthly installments of $356.11 over the 10 year lifespan of the homeowner loan.
The other method is a home equity line of credit. A home equity line of credit is very much like any other form of credit. The lender will assign you a certain amount of credit and you can borrow on this credit as you see fit. You do not have to take the full amount in one lump sum. You pay interest only on the money that you actually take out from the credit line. In most cases, the interest rate for this type of loan is variable over the life of the loan.
While most home equity lines of credit have a variable interest rate, homeowners can often negotiate for a fixed rate. A useful feature of the home equity line of credit is that is a revolving loan. What that means is that you can borrow money from the credit line, pay off the borrowed money, and then re-borrow the money again.
Home equity loans, either standard or lines of credit, can be used for just about any purpose the borrower wishes. They are particularly useful for home improvement project, funding of college tuition and associated costs, and for using as down payments on second homes or vacation homes.
There can be a drawback to using these types of loans, however. In the event the homeowner were to suddenly find himself with a cash flow problem, if the equity of the home has already been taken out, he or she would not have access to that money. This is actually the case with many homeowners who took out equity from their homes and then discovered that their adjustable rate mortgages were going to skyrocket. Because they do not have access to this money any longer, they are often faced with foreclosure or other financial problems. Had they not used the equity in the home, they could have borrowed against it to make up the shortfalls in the new, higher monthly home payments. Use home equity loans wisely and they will serve the homeowner well.
