Homeowners
who need cash may qualify to borrow against the equity in their homes. Home
equity is generally defined the current value of the home minus the amount of
liens against it -- like mortgage balances. If your home is worth $250,000 and
your mortgage payoff amount is $125,000, you would have approximately $125,000
in home equity. When considering home equity financing, it's important to shop
and compare your options.
Home Equity
Loan vs Line of Credit: What's the Difference?
A home
equity loan is sometimes called a second mortgage. It works in the same way as
your primary (also called your first) mortgage; it's issued for a specific
amount and repaid with fixed monthly payments. Home equity loans typically have fixed
interest rates and are fully amortized, which means there are no
"exotic" loan features such as interest only payments or negative
amortization. A home equity line of
credit (HELOC)
provides a line of credit and allows you to draw funds up to your maximum
credit line as needed. HELOC loans require monthly payments, but may allow
interest-only payments for a specified time. When the repayment period is up,
you'll be expected to pay off any balance due on your line of credit. The way
that you draw and repay funds for a line of credit is similar to the way you
draw and repay funds for other revolving lines of credit, such as credit cards.
Home equity lenders provide debit cards or checks to use for HELOC loan
withdrawals.
Benefits of
Home Equity Financing
The appeal
of both of these loans is their interest
rate, which is almost always lower than those of credit cards or unsecured bank
loans. That's because your home serves as collateral for either a home equity
loan or line of credit. In addition, the interest you pay on a home equity line
or loan may be tax deductible. Please consult a tax advisor to find out if this
applies to your circumstances. Lower interest rates on home equity loans and
lines of credit may make either option a good choice for consolidating consumer
debt.
Consumers should review interest rates and finance charges for all accounts
considered for consolidation. The goal of debt consolidation is to convert
multiple payments to one payment with a lower interest rate than the interest
rates of the accounts you consolidate.
Home Equity
Loan or HELOC Loan: Your Choice!
When you
consider home equity loan vs line of credit, your reason for borrowing is a key
factor. If you have a large one-time expense or want to consolidate a specific
amount of debt, a home equity loan is your best bet. That way, you can pay for
the expense and not have the temptation of available credit remaining. If you
expect recurring expenses, such as payments made to contractors during home renovation, a HELOC loan allows
you to "pay as you go." You are only charged interest on amounts
drawn against your credit line and can spread out your use of a HELOC as needed
rather than borrowing the full amount and paying interest on it in advance of
your needs. A HELOC also allows the flexibility of having funds available
without having to pay until you draw against your credit line; this can provide
ready cash in case of an emergency.
Home Equity
Loans vs Line of Credit: Comparing Costs
When
comparing a line of credit vs loan, the home equity loans and HELOCs both carry
higher interest rates than first mortgages. Home equity loans generally come
with fixed rates, but adjustable rates may also be offered. While adjustable
rates are often lower than fixed rates, they can change according to the terms
of the home equity loan or HELOC. Home equity lines of credit almost always
have adjustable rates; however, once the drawing period has ended and the
repayment period begins, some of them allow the borrower to convert them to
fixed-rate loans. Home equity loans require borrowers to pay for closing costs,
including escrow fees, title work, a home appraisal and document recording
fees. HELOCs don't require a formal closing and have lower upfront costs than
home equity loans.
Foreclosure
Risks
The Federal
Trade Commission (FTC) advises that home equity loans and HELOCs are secured by
your home, and either can be foreclosed according to state law. Second
lienholders including home equity lenders are typically notified if you fall
behind on your first mortgage. This may cause your home equity lender to
advance payment to the first mortgage lender and require immediate
reimbursement from you. Failure to reimburse your home equity lender can also
lead to foreclosure. While home equity financing provides convenient source of
cash, it can also tempt you to incur more debt than you can repay. World travel
and a garage full of toys won't be worth it if you lose your home.
Article
by Lendingtree.com
Courtesy
of First Choice Title Services & Escrow, Inc.
First Choice Title
Services & Escrow, Inc
3
SW 129th Avenue, Suite 202
Pembroke
Pines, FL 33027
Phone
(954) 433-7680
Fax
(954) 433-7355
maria@firstchoicetitleservices.com
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