home equit line of credit

A Home Equity Loan (HEL) is very similar to a regular residential mortgage except that it is usually a shorter duration and is in a second (or junior) position behind the first mortgage on the property - if it is a first mortgage. With a HEL, you receive a lump sum of money to the closing and agrees to repay it after a fixed amortization schedule (usually 5, 10 or 15 years). Much like a regular mortgage, the typical HEL has a fixed interest rate that is due to the closure for the duration of the loan.

In contrast, a home equity line of credit (HELOC) in many ways resembles a credit card. They are close to a certain credit limit that you can borrow up to - not a check. HELOC funds are borrowed "on demand" and you only pay back what you plus interest. Depending on how much your HELOC, you have a minimum monthly requirement (often "interest only"), beyond the minimum, it's up to you how much to pay and when to pay. Another important difference: The interest rate for a HELOC is adjustable meaning that they - and almost certainly will - change over time.

So, if you have decided that tapping your home equity is the smart move, as you decide which route to go? If you take some time to be honest with your situation through the following three criteria, you have the option to create a sound and reasoned decision.

1. Security or Flexibility: What do you value most?

For many borrowers, this is the most important factor to consider. Your home is collateral for either of home equity borrowing and, in the worst case, it could be seized and sold to an outstanding unpaid loan balance. People forget the double-digit interest rates of the early 1980s, and for many, the mere prospect of interest rates on variable home equity line of credit rising rapidly beyond their means is reason enough for them to work for themselves against a fixed rate HEL.

From the borrower's perspective, security is the main virtues of a fixed home equity loans. You borrow a certain amount of money for a specified period at a certain rate. The loan in precise monthly installments for the exact number of months. For many, knowing what their future obligations will be is the only way they can borrow against the equity in their home and still sleep at night.

A home equity line of credit, in contrast, is short on certainty but long on the virtue of flexibility. With a HELOC loan you bond on an irregular schedule to suit your needs at adjustable interest rates, which change rapidly. Repayment is flexible: you typically are required to only relatively small "interest-only" monthly payments on a HELOC. You have the flexibility to any payments on the interest only or minimum payment of the loan at your will.

2. They need money for a one-time lump-sum payment or the money is needed intermittently over several months or years?

Home equity loans are best suited for one-time payment needs (a good example is consolidating debt by paying off several high-rate credit cards at the same time). This is because at the time of close on a HEL, you are supplied with a standard check in the amount you have borrowed (less closing costs). While it may be empowering to have that much money will you pass humiliated by the fact that you immediately begin the interest costs for the entire balance.

If you have a HELOC loan, on the other side, you will receive a checkbook (or debit card) that you only when needed. For example, if you are on a multi-annual home improvement project for which you are writing to different times, a HELOC might be best. Similarly, a credit line is probably best for paying sporadic college expenses. Interest on a HELOC loan is only charged from the time that your HELOC checks clear the bank, and only for amounts actually disbursed ... not the value of the total credit line.

3. They have adequate financial discipline for a HELOC?

Financially disciplined borrowers can be the best of both worlds ... almost. By the conclusion of a HELOC loan, but pay it back after a self-imposed fixed amortization schedule they can enjoy both the flexibility of borrowing cash only as needed and the security of a fixed repayment schedule. HELOCs are typically more efficient in terms of lower closing costs and a lower initial interest rate. Also, a HELOC may be somewhat easier for borrowers to qualify for the low, flexible monthly payments mean debt to income ratios that loan officers are more favorable to the borrower.

The one major role in the HELOC borrower is the interest rate (see point 1 above). Interest rates will almost certainly be over the life of a HELOC. This means that a self-imposed "fixed" repayment plan must be periodically refigured. Numerous Internet sites offer free, powerful calculator, the mortgage can help you in preparing updated amortization lists when they are needed. Some lenders are also meeting borrowers' demand for greater certainty by providing HELOC products can be converted (for a fee) into a fixed rate loan if the borrower chooses.

As already mentioned, HELOC loans are like credit cards and the similarity extends to spending temptation. If you are a person who has trouble to steal credit card debts under control, and you have not taken steps to change habits, then HELOC probably not wise choice.

One could ask the home equity product most people actually choose. According to the Consumer Bankers Association 2002 Home Equity Study, home equity lines of credit for 28 percent of consumer credit accounts followed by personal loans (23 percent) and regular home equity loans (16 percent). In terms of dollar value, home equity credit accounts (Helse and HELOCs together) represent a full 75 percent of consumer credit portfolios with HELOCs with an 45-percent share of the market and Helse a 30-percent share. Of course, the popularity of HELOCs May subside if interest rates continue to rise.

Which home equity product you decide on the certainty that you buy for the best deal possible. The market is very competitive and there are many non-traditional ways, including on-line lenders and cooperative banks which should be considered in addition to your bank.