In recent times, obtaining cash from one’s own home has never been easier for homeowners. With the low interest rates of recent years, everyone who wanted to refinance has done so, leaving the credit market semi-stagnant.
At this point, lenders are eager to lend to anyone who barely meets their criteria. Knowing which type of loan is best suited to your situation is very important before you feed the “loan lions”!
There has been a recent rush of companies offering home loans and lines of credit. To make home repairs or add additions, more and more Americans are seeking home equity lines of credit instead of a traditional home equity loan (also known as a second mortgage).
Americans should consider several things before using either of the above two financial products.
Lines of credit are generally appropriate for people who need a lower initial rate and availability of money at unpredictable times. A home equity line of credit is also good if you’re not sure how much the project will cost.
Many owners are doing the hiring themselves. In this case, a home line of credit is best, as it simply pays for the project on an ongoing basis until completion, so you borrow only what is needed and don’t fall short due to unforeseen surpluses.
Home loans are best suited for those who need specific amounts of cash with payment stability. The biggest difference between these loans is the method in which you receive your money. With a home equity loan, you receive the full amount of money at closing. Using a home equity line of credit, one can borrow cash when needed, up to a predetermined amount of credit.
See the comparison below for additional details.
(a) Availability of Loan Funds: Home Equity Line of Credit: Borrow money when needed. You can borrow up to your set credit limit. When you pay off the principal, it’s added back to your line of credit balance for later use.
Home Equity Loan: Receive the full amount of the loan at closing in one lump sum. You cannot reuse the amount of this loan after the principal is paid.
(b) Interest rate: Line of credit with mortgage guarantee – Variable rate. Beyond the first monthly billing cycle, your interest rate is determined monthly, typically determined by the Prime Rate, when published in The Wall Street Journal, plus an operating margin.
Home Equity Loan: Fixed rate, interest, and payment stay the same.
(c) Payment structure: – Monthly payments vary according to the interest rate and the amount of principal that has been borrowed. These loans have a withdrawal period, usually 5 or 10 years, during this time you have the option of paying interest only, however, beyond the withdrawal period, you must pay principal and interest to repay the loan within the remaining years.
HELOC: The interest and principal payment stays the same for the life of the loan.
(d) Loan Advances: Home Equity Line of Credit – Simply write a money order for $250.00 or more.
Mortgage Loan: Full amount is received at closing.
(e) Rate Advantages: Home Line of Credit: Lower interest rates than your unsecured lines of credit, like credit cards.
Mortgage Loan – Lower payment options are available due to a variety of terms.
(f) Tax Advantages (Ask your tax advisor): Interest on both types of loans can be 100% deductible!
(g) Other Advantages: – Appropriate emergency fund for emergencies or unexpected expenses. You can check in multiple projects at once.
Mortgage loan: one-time use, less temptation to borrow more just by writing a check. Stable loan with a fixed rate, fixed payment and easier to budget.
Our intent with this report was to clear up the confusion between the two loans. Always be sure to do your due diligence before applying for any type of loan. Make sure you are well informed before searching for a lender. I know it’s hard to believe, but not all lenders will be honest and upfront with the finer details of the loan you’re looking for!
