A home equity line of credit, also known as a HELOC, is actually a revolving loan where the lender agrees to loan a certain amount over an agreed period within which the principal is the equity on their home. They are usually available in two forms: a credit line and a line of credit. The credit line allows a borrower to draw down the principal balance as needed. The line of credit works in a much the same way.
Borrowers can use their credit cards to make home equity lines of credit. In fact, many borrowers prefer to use a credit card to make HELOC arrangements rather than making a personal loan. The reason is that credit cards generally have a slightly lower interest rate than loans from a bank, although HELOCs are also available from banks. Credit cards also provide greater flexibility to repay the debt. However, if a borrower should end up unable to make a payment, the credit card company would not report it as a late payment.
In contrast, a home equity line of credit allows the borrower to freely borrow money against the equity on their home. Borrowers can decide to borrow as much as they want, at any time, as long as their credit limits are still intact. They do not have to pay interest on the amounts borrowed. If they need more cash now, they can just take out another line of credit. As long as the amounts they borrow are smaller than the principal balance on their home equity loan, this is also a convenient way to get money when they need it.
Although home equity lines of credit have lower rates and fees than a home equity loan, there is one key difference between them that can have a significant impact on the affordability of the home equity installment loan. That difference is interest rate flexibility. Equity loans come with fixed rates. Borrowers who wish to use the lump sum to pay off credit card debt or consolidate other debts may find this disadvantageous. They may need a lump sum now to avoid going into default, but at higher rates later.
To keep the monthly payment the same, even if a borrower wishes to make larger payments, they must refinance into a home equity line of credit. Otherwise, their payment will become larger, and they will not be saving any money on interest. When they refinance, they can choose to close their line of credit. They will not lose the equity in their home but will have to start all over again with a new payment schedule. This means more added expense.
When borrowers refinance, they can also choose to accept a home equity loan for the same amount. This means they would have paid off their existing loans and have received the loan for free. But, the new loan will need to be paid off with some sort of collateral – usually a property, house, car, etc. In the long run, the equity loan costs more to obtain because it requires collateral. Borrowers who are looking into home equity financing should research a number of lenders. Each equity loan provider has different closing costs.
There are closing costs associated with almost every type of equity financing product. The costs include application fees, appraisal fees, title and property registration, as well as legal costs and accrued interest. The lender will calculate these costs and offer you a quote. You should compare the quotes to your current bills and income to determine which company will offer you the lowest closing cost. If you have any extra cash, you may want to pay off any existing balances before you apply for an equity loan.
Home equity financing provides homeowners the opportunity to borrow against their equity to do certain projects such as home improvements and consolidate their existing debt obligations. It is important that borrowers carefully evaluate all of their options. Before borrowing against your equity, make sure you are able to meet the expected closing costs and that you truly have an interest in paying off the loan.