If you’re looking for a way to unlock some of the cash built up in your home’s value and equity, then a home equity lending product will be the right choice. Maybe you’re looking to consolidate debt at a lower interest rate, or maybe you’re looking to make home improvements. Whatever the reasoning behind applying for a home equity loan the attraction of having access to home equity in cash attracts a large percentage of homeowners.
The two routes taken by most homeowners to capitalize on their equity is a Home Equity Loan or a Home Equity Line of Credit, also known as a HELOC. Whenever a borrower applies for a loan in any form they always want to get the best terms and conditions, so before we examine how to get a good deal on home equity loans and HELOC’s let’s take a look at how these products differ.
A home equity loan is a lending product that allows you to access equity as cash in a lump sum payment.
The interest rates on these products are fixed and a lender will typically grant a repayment period of 5 to 15 years. This type of loan essentially works exactly as a mortgage and a borrower will even have to pay closing costs which can be a major drawback when in comparison to a HELOC. Consider a fixed home equity loan for major home improvement projects or if you feel rates may rise considerably.
A HELOC on the other hand functions more like a credit card and many banks can actually issue you a card directly linked to your HELOC. With this type of loan, you are granted a set dollar amount and fixed amount of time for which you are able to borrow. A HELOC is a revolving line of credit and with this option flexibility is the main advantage. Users do need to beware that the interest rate charged on a HELOC is typically a floating rate, so the interest charged can change over time.
During the application process, a borrower should reach out to as many institutions as they can to shop rates. Being a simple in nature product, the rates and terms of home equity loans and HELOCS are usually straightforward and can be compared with relative ease. One thing to look out for is when a rate seems too good to be true as many times it is an introductory rate for a short period of time, with far higher rates later.
One drawback of these loans is that they typically come with many intertwined fees. A home equity loan or HELOC will almost always have annual fees and pre-payment fees. While these may not be a big surprise a borrower may also be expected to pay for closing costs of the loan which can include document preparation fees, home appraisal fees, and title searches. Again someone should shop around here as a bank often has the ability to waive many of these fees with a little negotiating.
For the right purposes, home equity loans and HELOCs are a great tool but always remain aware your home is being used as collateral. Always be sure of your finances and your ability to repay the loan as to avoid getting yourself in hot water.