Posts Tagged ‘home equity loan’
The main difference between HELOCs and equity loans is that the borrower does not receive the whole amount up front. The money you get with a credit line should not be over the credit limit, meaning that lines of credit are similar to credit cards. You can withdraw money from the line of credit until the draw period ends, which is from 5 to 25 years. The amount drawn is to be repaid, plus interest. The full principal amount is repaid when the draw period ends, either according to an amortization schedule or in a lump sum.
Home equity lines of credit have some advantages compared to equity loans. One advantage is that the borrower can repay the credit line at a time of his convenience. If you are making payments toward a mortgage loan, and it is a closed mortgage, a prepayment penalty applies for paying it off early. Then, the variable rate offered with credit lines is lower than what borrowers get with other financial products. This means that borrowers are given access to inexpensive money.
Similar to home equity loans, you can use the amount borrowed for anything you see fit. At the same time, there is an added advantage to having a home equity line – once you pay it back, you can draw more money.
At the same time, home equity loans are flexible and desirable lump sum loans for some, featured with low interest rates. A home equity loan is a good option for people who need a larger sum of money for a short-term or long-term project or to pay medical bills.
Then, HELOCs are beneficial for persons who need a considerable sum of money over a certain period of time, for example, for a home remodeling project or college education which require long-term payment plans. Low interest rates are the main advantage home equity lines have over credit cards. The interest rate on home equity lines of credit is lower than the prime rate. Unlike this arrangement, credit cards come with an interest rate of around 18 percent.
As an added benefit, interest applies only to the amount drawn. If money is sitting idle, no interest applies to them, which is not the case with other types of loans. With such loans, borrowers pay interest on the full amount borrowed, regardless of whether they use the money. Finally, HELOCs are offered with no closing costs in most cases. This is beneficial in saving lots of money.
One point to consider is that some lines of credit charge a monthly or annual fee, or sometimes both. The fact that your home is used as collateral is one major disadvantage of HELOCs and home equity loans. You can lose your home in case of default. Making timely payments is important, regardless of the terms and conditions you have been offered.
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