There are
typically two types of home equity loans:
term, also known as closed-end loans, and
Home Equity Lines of Credit, also known as
HELOCs. While both are technically "second
mortgages", the term is used most commonly
to refer to term loans. Home equity loans
are usually for shorter periods than the
first mortgage used to purchase the home,
and require that you make two separate
payments: one towards your original
mortgage, and the second towards your new
loan.
Term Loans
In a term
loan, you are given your money in one large
lump sum, after which, you can no longer
borrow from the loan. You will pay off your
loan over a specified amount of time, with a
fixed interest rate and the same payments
each month. If you know exactly how much you
need to borrow, and don't have plans to
borrow again, then a term loan may better
suit your needs.
HELOCs
HELOCs
can be used to consolidate outstanding loans
from credit cards, installment loans, or
personal loans. For this reason, HELOCs are
also commonly referred to as
debt
consolidation loans. HELOCs allow for more
flexibility than fixed-rate home equity
loans because they work like a credit card
in that you are allowed to borrow up to a
certain specified amount for the life of the
loan. You can withdraw money as needed, and
as you pay off the principal, your credit
revolves and can be used again. The interest
rate on your credit line is variable and
fluctuates over the life of your loan, and
your payments will depend on this variable
interest rate and how much credit you have
used. Once the lifespan of your credit line
expires, you must pay back your entire
balance, and it is up to your lender to
decide if you will be allowed a renewal.
You can
withdraw money from your HELOC using an ATM
card or write checks on your credit line.
Lenders typically require that you take an
initial advance when you set up your loan,
withdraw a minimum amount, and leave a
minimum outstanding balance.
Ask yourself these
questions when trying to decide which type
of home equity loan is more suitable for
your needs:
-
When do you need the
money? For how long?
-
How long will it take to
pay it off?
-
How big a monthly payment
can you afford?
-
Will having a HELOC be
too tempting?
Some questions to ask
when speaking to your lender:
-
How long will you have to
use your line of credit?
-
What is the life span of
the line of credit?
-
How large a line of
credit do you qualify for?
-
Is the HELOC renewable?
-
What are the interest
rates?
-
Under what conditions can
they freeze, reduce or demand full
payment of your loan?
-
Can you lease your house
during the time of the loan?
-
Will they loan to you if
your house is on the market?
Mortgage Glossary1
