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Home Equity Loan Checklist

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Home equity loans - a checklist
 

With housing prices at all time high levels, many Americans are finding that their houses are worth a lot more than they owe on them. The difference between a home’s value and the debt owed upon it is the home’s equity. Equity is a nice thing to have; it represents actual cash value. If you want to or need to sell the house, you can pocket the equity as cash. You can also borrow against it, as banks and other lenders recognize that the equity in a home is a tangible asset. 

A growing part of the lending industry is the business of offering home equity loans, or second mortgages. These loans, apart from primary mortgages, allow consumers to borrow substantial sums of money at favorable interest rates, as the loans are backed with collateral in the form of the value of the home. 

There are two primary types of home equity loans -the fixed term loan and the home equity line of credit, or HELOC. They vary slightly and many consumers are confused as to which type would best suit their needs. Below is a checklist that may help.
Savings

Why do you need the money? Do you need it all at once?

There are various reasons why you might need the money. Home remodeling, education or any one of a number of other things. If you need the money all at once, a term loan is the best route. It has a fixed interest rate and a fixed repayment schedule. If you need the money a bit at a time, you would be better off with a HELOC, which will let you borrow money on an as needed basis.

How much can you pay each month?

Term loans have a fixed loan amount. A line of credit is more flexible, with repayments set up so that the early years of repayment are on an interest-only basis. Payments tend to be lower, provided that interest rates don’t climb.

What about interest rates? 

Term loans have a fixed rate. A HELOC has a variable rate. As rates rise, as they have been recently, your payments will increase, too. If you are worried about rising rates in the future, you may wish to stick to a term loan.

Are you financially irresponsible?

If you are the sort who might be a bit reckless with their money, perhaps a line of credit isn’t for you. A line of credit can be “tapped” using a checkbook or a credit card, and it could be easy for some people who don’t have a lot of discipline to spend more money than they would be comfortable paying back. If this is you, then you may wish to go with a term loan, which cannot be renewed.

Lenders offer different types of loans because consumers have different types of needs. Some people are better served with a loan that has a fixed, regular repayment schedule. Others do better with greater flexibility. If you aren’t sure which type of loan best suits you, consult with your lender.

 

 

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