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Types of Home Equity Loans
What Are the Different Ways
to Access the Equity in My Home?
Here are three ways you can use equity to borrow against the value of
A Basic Home Equity
Loan ~ Similar to a second mortgage, a standard home equity loan allows
you to borrow in a traditional manner and the monthly payments and interest
will also be fixed for the term of the loan. A fixed-rate of interest and a
fixed term of payment are offered against your equity share in the property
and the amount that you wish to borrow is transferred to you in one lump sum.
- HELOC or a Home Equity
Line of Credit ~ A HELOC is a very good way to access the equity in your
home, but not have to pay interest on the total amount available, if you do
not wish to borrow the full amount at one time. Working for you in very much
the same manner as a revolving credit account, a HELOC account will come with
a checkbook or credit card that is issued just for this purpose.
If it is determined that
your home equity share is $30,000 you will be able to borrow whatever amount
you wish, up to that amount, by simply writing a check or using the card. You
will then only then be required to pay interest on the portion of the HELOC
that you have actually taken out of the account. More often than not, your interest
rate is pegged to the constant changes in rates and will fluctuate correspondingly
for the full term of the loan.
So, if, as we have suggested
here, you are granted a $30,000 line of credit and you borrow $15,000 of it
by using your checks or cards, and then repay $10,000, you will be left with
a balance of $25,000 that is at your disposal. Once again, the rate of interest
is constantly fluctuating and so do you payments.
- Cash-Out Refinancing ~ Although you end up using the equity
in your home to get cash for whatever your needs may be, Cash-out refinancing
is not, by definition, specifically a home equity loan.
What you are doing is taking
out a new loan through refinancing the old one. You request an amount that is
higher than what you currently owe on your mortgage, up to the total value of
the property, and then pay off the old loan with a portion of the new loan.
The balance that remains is yours to do with as you please.
Example: The current
value of your property is $200,000 and the mortgage is for $175,000 leaving
you with $25,000 in equity. You borrow $190,000, satisfy your old loan with
$175,000 and you pocket $20,000. It is best to do this if the current interest
rates are now lower than when you took out the first mortgage. You will not
only get the cash that you needed, but you are now paying a lower rate of interest
than you were before, thus saving additional money in the long run.
does carry costs, as opposed to the other two options given above, so be sure
that you examine what the costs will be and if the situation is going to work
out in your favor overall. Only then should you reach a decision.