(LoanSafe.org) — We’ve written a lot on refinancing lately. With mortgage rates still lower than they were years ago, they are expected to rise sometime this year. There are many reasons why anyone would want to draw against their home equity such as debt consolidation, home repairs, paying off another loan, or just to gain extra savings. Something important to know when thinking about refinancing is to know the difference between home equity loans, and home equity lines of credit (HELOCs).
Home equity loans can be defined as a second mortgage that is taken against the equity of your home for the use of a large (typically one time) expense. The amount will generally be very specific and delivered as a lump sum. Although it is common to refinance at a fixed rate, interest rates may vary. An easier way to budget with a HEL is to get it as a fixed rate loan. When fixed, payments will be equal for the entire life of the loan.
HELOCs can be defined as open loans which have funds taken against the equity of your home that can be used when needed. In a sense, these loan types are more like credit cards. The difference between a HELOC and a credit card though is the significant difference in interest. Interest rates are currently much lower than those of credit cards, which can range up to ridiculous amounts depending on your provider. Interest payments with refinance loans can be tax deductible often as well. Monthly payments are made for this loan.
A common example for the use of these two loans is a large roof repair job. If you’re doing the repairs all at once, an equity loan probably is the best option for you. If you arrange to make payments over time HELOCs would be a more suitable option.
Although the pricing of these two refinanced loans is quite similar, there are some differences. First off refinancing will automatically have higher interest rates than first mortgages do. However, it’s how you handle the interest that will count. Adjustable rates may be wiser when choosing a HEL, although fixed rates are available as well. Remember to consider the closing costs with a HEL too.
HELOC’s withdrawal period usually ranges between 10 to 20 years. After this you’ll be obligated to pay the outstanding balance along with interest in a fixed period. Because HELs come in large lump sums, the payment period will be whatever the amount of years that you agreed on with your lender.
When it comes to the interest rates of a HELOC, lenders can be more flexible. This said, there is higher risk too because the rate fluctuates according to the prime rate. Few to no closing costs come with this loan.
The requirements of a HELOC are to provide proof of:
– Ownership of property
– Mortgage ownership
– Property ownership
– An appraisal if required
The requirements of a HEL are to provide proof of:
– 20% of your current mortgage been paid off
– An appraisal if required