Happy Home InsiderHome equity loans (HEL) allow you to borrow a large lump sum that’s secured by the equity in your home. The amount you’re qualified to borrow is dependent upon a number of different factors such as your home’s loan to value ratio, payment term, income, and credit history. Home equity loans tend to have fixed interest rates, fixed terms, and fixed monthly payments.
Home equity lines of credit (HELOC), are similar to home equity loans in that they allow you to borrow money against your homes value, however, unlike the one-time, lump sum loan afforded to the borrower by home equity loans, HELOCs allow individuals to borrow money as they need it. Lenders will approve applicants for a line of credit that they determine by taking a percentage of the home’s appraised value less the amount still owed on the mortgage, as well as factoring in other variables such as income, credit history, and other outstanding debts.
The biggest difference between HEL and HELOC are the repayment policies and the interest rates. Home equity loans usually have fixed interest rates, whereas home equity lines of credit tend to have variable rates. Fixed interest rates lock in the amount the borrower will pay each month, while variable interest rates mean payments may go up or down. Variable rates are determined by publicly available indexes as well as margins that are customarily included by lenders. It’s important to know which index your lender is using, what amount of margin they charge, how frequently the rates adjust, and what the rate cap and floors are when looking into HELOC.
Home equity loans are paid back via a set monthly payment comprised of both interest and principal until the full loan amount is satisfied. In some instances, individuals may be permitted to make larger payments in the event that they have a sudden cash influx and want to pay down the debt at an accelerated rate. However, if you opt to make larger payments, you may be charged a penalty for making early payments; whether or not you’re charged for making early payments is entirely at the lenders discretion.
Most HELOCs have an initial period over which you may draw funds over a predetermined amount of time; this is known as the “draw period.” At the end of the draw period, you may be eligible for a credit line renewal, however, not all lenders allow for renewals. In some instances, lenders will require that the entire loan be repaid at the end of the draw period, while others allow for payments to be made over another set period of time following the draw period known as the “repayment period.”
It’s advisable that you get a thorough accounting and clear picture of your financial situation before tapping into your home’s equity. Once you’ve decided to elect one of these options, weigh out the pros and cons of both when determining which is right for you. It’s also imperative that you shop around to find the best rates and terms available to suit your financial standing.
