When you need money for your next project, a home equity line of credit can be a big help. Getting this kind of loan could be the best way to pay for a project or several projects. Here are four reasons why a home equity line of credit (HELOC) might be the best choice.
- The interest rate is less.
Even though it is a second mortgage, a home equity line of credit has an interest rate that is just a little bit higher than prime rate. This means that it has a much lower interest rate than a credit card, a personal loan, and maybe even most other types of loans, except for a first mortgage.
- Don't pay for anything you don't use
Another great thing about this type of loan is that you only pay interest on the amount you use. With other loans, you pay interest on the whole loan. This means that if you have a 10-year draw period but have only used half of the money after five years, you have saved a lot of money even though you still have access to a much larger amount.
Even if you get a home equity loan, you'll pay the same amount of interest on a regular loan, whether you use all of the money or not. If you need money for projects, you have it, and if you don't, why pay interest on money you don't use? This kind of loan is great if you want to do more than one project but don't know how much each one will cost or if you might want to add another project in the future.
- Lower payments each month
During the draw period of a home equity line of credit, your monthly payments will be low. This is because you will only pay interest, and you will only pay interest on the amount you have actually used. So, you will get very low payments during the draw period, which could last up to 11 years.
You should know, though, that one of two things will happen at the end of the draw period. You will either have to make a one-time payment for the full amount, which will probably require refinancing, or your fully amortising payments will become much higher than they were before because they will now include the principal.
- Few Costs to Close
Another reason why a home equity line of credit is a better choice than other loans is that there will be less money spent on fees and closing costs. When you get a HELOC from some lenders, you might not have to pay any fees at all. Depending on how big the loan is, this could save you a couple thousand dollars.
Before you sign any HELOC agreement, though, you should make sure you know what the margin is. This is an interest rate that is added to the overall APR, and unless you ask, you probably won't be told about it. Also, get several quotes for your home equity line of credit, look them over, and pick the best one for your needs.
