Understanding Home Equity Loans and Lines

Victorian House
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One of the greatest benefits of owning a home is that you can use the home as collateral when you need to get a loan for expenses in your life. Most commonly this is done to cover large expenses such as repairs to the home or payment of college tuition for the kids although the funds can be used for anything. There are pros and cons to getting a home equity loan and there are different types of home equity loans to get so it’s important to understand the loans carefully before applying for them. Following you’ll find some basic information about these loans to assist you in gaining that understanding.

Closed Ended vs. Open Ended Loans

There are two different ways that payments may be received with a home equity loan and it causes the loans to differ significantly. The first is the closed-ended loan which is the typical home equity loan which comes with a lump sum payment. The second is the open-ended loan which is paid out over time as needed and which is typically known as the home equity line of credit (or HELOC) loan.

Benefits of Closed Ended Home Equity Loans

The more common of the two types of loans is the closed-ended traditional home equity loan. This type of home equity loan has a number of benefits in comparison to the home equity line of credit. Some of those benefits include:

– The payment is a lump sum payment which means that you get a big chunk of cash at one time to be used for large bills such as home remodeling or debt consolidation.
– The home equity loan usually comes with a fixed interest rate. Most people prefer this to a variable interest rate (which is common with the home equity line of credit) because it means that they always know what the rate will be despite changes that take place in the economy. This is particularly good, of course, if you are able to lock in a low rate on the loan.
– The typical length of the home equity loan is fifteen years which means that this loan is repaid in small monthly payments over a long period of time. This makes the home equity loan a much more manageable loan than other loan options for most people. This monthly amount varies less over time than the home equity line of credit and so allows for easier financial planning.

Benefits of Open Ended Home Equity Loan

Some people prefer to take out a home equity line of credit instead of just getting a lump sum home equity loan. These are some of the benefits that people see to choosing this type of home equity loan:

– The payment can be taken on an as-needed basis over time. People prefer this when they don’t have huge payments to make and when they may need emergency money (such as that used for medical expenses) over time.
– You only have to pay back what you actually owe. This can reduce the total amount paid in interest in comparison with the traditional home equity loan although that fact varies with interest rates and other factors.
– The interest that is paid on a home equity line of credit can sometimes be deducted from personal taxes which is not generally the case with the home equity loan.

Similarities Between the Home Equity Loan and Line of Credit

Despite the fact that there are differences in the two types of home equity loans, there are similarities between them that should be considered as well. Those features include:

– The home will be collateral for the loan. This is a very serious thing to consider. It ultimately means that failure to repay the loan can result in the loss of the home.
– Both loans generally allow you to borrow up to one hundred percent of the value of the home (based on appraisal). This depends on the lender, the borrower’s credit history and income information and other factors but that’s true for both loan types.
– Both loans may have various fees associated with them. These should be reviewed carefully with the lender before determining that this is a good way to get money.

Alternatives to the Home Equity Loan and Line of Credit

These are not the only options to consider so you should be aware of alternatives that are out there. Cash-out refinancing is one option in which you take out a new mortgage on the home to pay off the old mortgage and access additional cash. The reverse home mortgage is an option for seniors over the age of 62 who want to get cash from their homes as monthly payments or lump sum installments. In most cases, the traditional home equity loan or home equity line of credit will be best but that’s not always true so always review the options in depth as you make these types of financial decisions.