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Which Home Equity Loan is Right for Me?
Three Options That You
Need to Look at and Consider Are:
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A Home Equity Loan
has the following advantages over a home equity line of credit, or HELOC. Home
equity loans do not usually have fluctuating interest rates and the additional
costs are less. They are also a bit easier to manage and pose less of a worry
because of their stability and known costs throughout the term of the loan.
A home equity line of credit,
HELOC, has a variable interest rate and your monthly payments will vary over
the life of the loan. A home equity line of credit also gives you the option
of making minimum payments on the outstanding amount. The option to make minimum
payments can substantially increase the amount of interest you will pay over
the life of the loan. Unlike a HELOC, where you are allowed to make minimum
or partial payments, you will not end up with a balloon payment for a traditional
home equity loan. As long as you do not opt for a balloon payment at the end
of your loans term you avoid paying a large lump sum at the end. Further, you
will not be charged transaction fees with a home equity loan and there are no
minimum or maximum withdrawal amounts to constrain you.
A Home Equity Line
of Credit(HELOC) is the perfect choice when you need to access money periodically
or you do not know exactly how much money you will need. School loans, which
are paid out over a typically four-year period, are one example of not needing
all of the money at one time. If you are renovating your home, and the work
schedule is for a protracted or sporadic period, this too is a situation well
suited to a HELOC. In both of these instances, you benefit by accessing the
funds only when they are needed.
If you are looking into
getting a HELOC to resolve other debt issues be careful. Most people who do
have problems with excessive or overdue debt are people who are not as capable
of managing their lines of credit and finances. You probably have credit cards
that are at their limits. HELOCs work similarly to credit cards and you can
fall into the same trap again and risk losing your home, too. If you only make
the minimum or partial payments, and get stuck with a balloon payment at the
end, you may not be in a position to do so.
Home equity lines of credit
usually have lower interest rates than home equity loans and home equity lines
of credit are also a good choice if you only need to borrow a small amount and
you know you will be paying it back rather quickly.
Cash-Out Refinancing has the advantage of a lower interest rate than a home equity loan but it has
the disadvantage of having higher closing costs. Refinancing usually takes longer
to pay back than a home equity loan, which means there is more interest to be
paid over the term of the loan. Also consider how soon you will need these funds,
as refinancing generally takes longer to finalize. You should only choose refinancing
if your refinancing interest rate is lower than your current mortgage. The lower
refinancing interest rate will lower your monthly payments. Only choose refinancing
over a HELOC if the savings in lower monthly payments helps you to recover the
money spent on closing costs of refinancing before you sell your home.