How Home Equity Loans Work
How They Work
Home Equity Loans are installment loans. The interest rate charged generally is fixed and you make a fixed monthly payment.
Home Equity Loans are like a second mortgage. You may have to pay a processing fee, an appraisal fee and points. This adds to the cost of your loan. The interest rate plus the points, averaged over the time you expect to remain in your home is called the “effective interest rate”. However, from time to time, some financial institutions waive closing costs, so shop around.
Home Equity Credit Lines As a revolving loan, Home Equity Credit Lines work a little like credit cards. You don’t have to immediately take all of the money made available to you. You can take money as often as you like, up to your credit line. You have instant access to it. And your credit line can be reused, as its repaid.
While this appears to be an open-ended loan, it’s not. The lender sets a limit to the term of the loan, usually 5, 10 or 15 years. And at the end of this period, you will need to pay off or refinance the entire amount of the credit line.
Home Equity Credit LInes often have adjustable or variable interest rates. That means the interest rate may fluctuate over the term of the loan. Interest is charged only on the amount of credit you use and it’s added to the balance on a monthly basis. You repay a portion of the total balance each month.
Like Home Equity Loans, Home Equity Credit Lines are essentially a second mortgage. You will probably be required to pay a processing fee, an appraisal fee and points. These added costs spread out over time that you will remain in your home, in effect, raise your interest rate. But shop around. Some financial institutions do occasionally waive closing costs.
Home Improvement Loans Home Improvement Loans work the same way as home equity loans. But in some States, they are offered on an unsecured basis.
Reverse Mortgages A reverse mortgage isn’t an option for everyone. And not every lender offers reverse mortgages. You must own your property free and clear. And you must meet certain age requirements.
With a reverse mortgage, the lender is, in essence, buying part (or all) of your home from you and paying off the principal in installments to you. You get to live in the home. But instead of the lender paying interest to you, you pay interest to the lender. That interest also accrues against your home. At the end of the term of the mortgage, you sell the home to pay off the accumulated interest.
With a Reverse Mortgage, you will receive only a percentage of the value of your home. How much you can borrow depends on the value of your home, its condition, and your age. Generally, the older you are, the more you can borrow. Remember though, at the end of the loan period, you will be without a home.
There also a tax benefit with reverse mortgages. The interest is usually fully deductible (consult your accountant or tax advisor for detail).
How To Choose A Home Equity Loan
Loans secured by your home are always large amounts that you’ll pay off over a long period of time. So you’ll want to get the best deal possible. In this section, you’ll find some information and tips to help you.
What Type Of Home Equity Loan Is Best For You shows you how to match a type of Home Equity borrowing with your needs. Home Equity Borrowing Tips And Terms prompts you on some things to consider when you’re selecting a loan. And, Banks Near You links you directly to banks in your area to find the right type of loan to meet your needs.
What Type Of Home Equity Loan Is Best For You?
The funds from Home Equity borrowing can be used for a lot of different purposes. You can use both Home Equity Loans and Home Equity Lines of Credit for the same purposes.
But the differences in fund disbursal and repayment arrangements may make one more attractive for a particular purpose than the other. Here are some suggestions for how each can be used best.
|Your Need||Suggested Type
|On-going needs such as College Tuition, Long-Term Medical Care||Home Equity Credit Line||Lets you withdraw money as you need it.|
|One-time major purchases, such as a Car, Boat or RV||Home Equity Loan||Fixed interest keeps costs under control.|
|Debt Consolidation||Home Equity Loan or||Lets you reduce your payments, lower your interest rate compared to credit cards.|
|–||Home Equity Credit Line||Variable interest rates may make initial payments very low, just when you need them.|
|Retirement Funds||Reverse Mortgage||Lets you live off the equity in your home.|
|Home Improvements||Home Improvement Loan||Money can only be used for home improvements. Interest is tax deductible based on State regulations.|
|–||Home Equity Loan||Cash disbursed all at once. Great for large projects. Low fixed interest rate helps with budgeting big make- overs.|
|–||Home Equity Credit Line||Cash can be withdrawn as needed over a long period of time.|