Home Equity Loans
The ads say that your home is a hidden source of cash but what they really mean is that your home is a hidden source of credit. You can turn that credit into cash but only by taking out a loan.
There are many types of loans that can be taken out on a home. Most people have a primary mortgage, although second mortgages and home equity loans are becoming more common. Both are ways to tack on extra debt to an existing loan and get money out of a piece of real estate without actually selling it.
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There are advantages and disadvantages to each type of loan. Second mortgages and home equity loans usually have higher interest rates than primary mortgages. It’s usually a good idea to evaluate all the options before committing to one.
One of the advantages of a home equity loan is flexibility. Often lending institutions will structure a home equity loan as a line a credit instead of a traditional mortgage loan. With a line of credit, you don’t actually have to borrow the money until you need it. You’re given an account and you write checks against the account.
There are different fee structures associated with home equity lines of credit as opposed to primary or secondary mortgages. Some lenders will have annual or membership fees. There might also be fees charged when you draw on the credit line.
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Home equity loans can be for a fixed amount with a fixed interest rate. The monthly payments on this type of loan stay the same for the life of the loan. With a home equity line of credit, the interest rate is usually tied to the prime rate and will fluctuate.
Also, the monthly payment on a home equity line of credit will depend on the amount that’s actually been borrowed. It’s similar to the way the minimum payment on a credit card will be tied to the account balance.
Because a home equity loan is secured with your home, it’s better to use this kind of loan for long term gains, like home improvements that will increase the value of your home or financing a college education.
Before you sign any loan, look at all the alternatives. The investment of your time will pay off in the long run when you have a loan that will achieve your financial goals.
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