When you need to get money from the equity in your home, you may find that you have a few options. Should you get a home equity loan, or would it be better to get a home equity line of credit (HELOC)? Here are some things about each that may help you decide which one is better for you.
If you are sure that you want to get all of the money from your equity in one lump sum, then a home equity loan is the best choice for you. This means that this is the way to go if you know you need the equity right away and have a purpose (or more than one) for the money. You can do whatever you want with the money from a home equity loan or a home equity line of credit. This could be your ticket if you want to send a family member to college, buy a boat, fix up your house or add on to it, or go on a trip.
A second mortgage is a home equity loan, and you may have up to 15 years or more to pay it back. It usually comes in the form of a mortgage with an adjustable rate, but you can also find lenders who will give you a fixed rate.
A home equity line of credit, on the other hand, will give you some choices that a home equity loan won't, especially if you don't need all the money at once or aren't sure if you do. A HELOC is also a second mortgage, but instead of getting all the money at once, you get a line of credit and a credit limit. With a credit card or a checking account, you can get money when you need it.
Most of the time, you have to take out a minimum amount right away, and then you start paying interest on that amount every month. Right here is a big difference. You only have to pay interest on the money that you have actually taken out. So if you don't use it all, your interest and monthly payments will be less. Since the interest is often calculated every day, the size of the payment each month will be different. You also have a certain amount of time to get the money out, usually around 11 years.
Most HELOCs have a 25- or 30-year term, which is split into two parts: the draw period and the amortisation period. During the draw period, you can do whatever you want with the money. But when the draw period is over, it is time to start paying back the loan. You can't take out any more money, but your payments are recalculated and you start paying off the loan.
But there are different ways to do this, and before you sign, you need to know which one will work for your mortgage. At the end of the draw period, there could be a one-time payment called a "balloon payment." You would have to refinance to do this. Other terms might just be monthly payments for the rest of the full term, or you might be able to make other plans.
You are the only one who can decide whether a home equity loan or a home equity line of credit is better for you. No matter what you choose, though, make sure to get several quotes and compare them carefully to find the best deal. There may be a lot of difference between the interest rates and other terms. Some are good, while others are just bad.
