Your home is your most valuable asset and also allows you to obtain further home equity loans and credits when you are in urgent need of further loans and credit. When people refer to these loans, they generally refer to the terms 'home equity loans' and 'home equity lines of credit' interchangeably. Though they may seem to mean the same thing, they are in fact quite different in nature.
While home equity loans are more like the traditional mortgages, in which you get the loan amount as a lump sum and you then repay the interest as installments over a set stretch of time. Home equity loans work on the principles of fixed rates and fixed payments.
On the other hand, home equity lines of credit work more like credit cards. This form of loan allows you to borrow an amount up to a certain limit. As you keep on paying off certain portions of your debts, it opens up more credit limit for you. These loans however, work on the principle of variable interest rates.
Though home equity line of credit works on similar principles to the credit card, there are still some differences between these two forms of credit. Credit cards come with the typical open ended feature. But this is not the case with the home equity credit line. There is a specified time frame, usually about ten years, during which you are allowed to draw any amount within your credit limit. During this period you are required to pay back the interest amount only. On completion of the drawing period, you can no longer make any further withdrawals from the credit account. The drawing period is then followed by the payment period, which is the time you have to start paying off the principal as well as the rest of the interests. Certain financial institutions may renew the draw period, but that only adds to your burden seeing that sooner or later you have to eventually pay off the principal.
Once you obtain a home equity line of credit, you will be able to borrow within your credit limit whenever the need arises. You have to use special checks to draw on your home equity credit line. There are also certain financial institutions and some credit plans that allow the borrower to use a credit card to draw cash on their credit line.
There are certain limitations with regard to how you make use of the home equity credit line. There are some plans where you are required to take out a minimum initial amount when the credit line is initially activated. Some plans may also fix a minimum amount that you have to draw each time you are withdrawing from the credit line.
Loan Vs Home Equity Line Of Credit
When it comes to home equity loans, there are mainly two different options: A second mortgage loan or a home equity line of credit. The following article will explore the reasons why a second mortgage is a much better choice than a home equity line of credit in most occasions and especially given the current market conditions.
Second Mortgage Vs. Home Equity Lines of Credit
A second is just like a regular mortgage loan, it is a secured loan guaranteed by the same asset as the first mortgage and holds an interest rate that can be fixed or variable. The flexibility regarding the interest rate type is the distinctiveness we will focus on in this article.
Home Equity lines of credit on the other hand, let you borrow and repay as much money as you want till you reach certain limit fixed by the remaining equity on your home. However, once you repay part of the money borrowed, you can borrow again without requesting a new loan. This revolving line of credit is not as flexible when it comes to interest rate type. Equity lines of credit ALWAYS come with variable interest rate.
Interest Rates, The Key Issue
Interest rate is always an issue to be taken into account. When in times of low interest rates, one tends to forget about it and concentrate on other benefits; however it should always be the center of our attention when considering the possibility of applying for a loan.
Certain recent events have proved that the above is true. Those who are stuck with a variable interest rate loan are now regretting their choice since in the past months, the interest rate charged has been escalating dramatically. And nothing seems to suggest that this trend is coming to an end in the near future.
Those who have selected fixed interest rate loans are praising themselves for being so conservative and they deserve the praise. They are saving thousands of dollars in interests while at the same time having the confidence that their monthly payments will remain static for the whole life of the loan.
Summing up
As explained above, home equity lines of credit do not offer the possibility to select a fixed interest rate, so you are always risking the possibility to end up paying a higher interest rate due to changeable market conditions. And given the current state of affairs, with this interest rate increasing trend, the home equity line of credit option doesn't seem the way to go.
Thus, second are the best option for you. You can simply borrow just the amount of money that you need or you can always borrow a bit more, as long as you can afford it and keep it in a savings account if you plan to use it in a near future. Second mortgage loans are the right option if you are considering home equity loans especially due to the instability of current market conditions that can skyrocket interest rates at any time.
Both Susan Jan & Richard Revis are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Susan Jan has sinced written about articles on various topics from Data Recovery, Travel Insurance and Watches Reviews. To apply for a go to. Susan Jan's top article generates over 135000 views. to your Favourites.
Richard Revis has sinced written about articles on various topics from Join the Army, Debts Loans and Car Loans. Richard Revis is an expert in the financial industry and knows exactly how to aid you in getting approved for the loan or credit card you need. He has helped a lot of people to obtain personal loans, home loans, unsecured credit cards and many other produ. Richard Revis's top article generates over 8100 views. to your Favourites.
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