HELOCs Better Than Equity Loans – An Honest Opinion
Home equity lines of credit are different from equity loans mainly in that borrowers do not get the full amount up front. The sum of money that can be used with a line of credit cannot exceed the credit limit, and this works much like a standard credit card. You can withdraw money from the line of credit until the draw period ends, which is from 5 to 25 years. You should pay back the money, plus interest. The full principal amount is repaid when the draw period ends, either according to an amortization schedule or in a lump sum.
Home equity lines of credit have some advantages compared to equity loans. One advantage is that the borrower can repay the credit line at a time of his convenience. If you are making payments toward a mortgage loan, and it is a closed mortgage, a prepayment penalty applies for paying it off early. Second, lines of credit are offered with a variable interest rate which is lower than the rate on other products. You borrow inexpensive money.
Similar to home equity loans, you can use the amount borrowed for anything you see fit. At the same time, there is an added advantage to having a home equity line – once you pay it back, you can draw more money.
On the other hand, some argue that home equity loans are among the most desirable and flexible lump sum loans, mainly because they are offered with a low interest rate. They are also beneficial for persons who need considerable amounts of money for medical bills, large-scale projects, and short-term ones.
Home equity lines of credit are also beneficial if a substantial amount of money is required over a long period – to pay college tuition or for something else. HELOCs also have certain advantages over credit cards, the main being lower interest rates. Home equity credit lines are also offered with an interest rate that is lower than the prime rate. In contrast, the interest rate on credit cards is about 18 percent or higher.
Another advantage of home equity lines of credit is that the borrower is charged interest only on the amount drawn. Thus, no interest rate applies to money, which is sitting idle, unlike other loan types. With them, interest is charged on the whole amount, even if the borrower does not use the money. Finally, home equity lines of credit do not have closing costs. This is beneficial in saving lots of money.
One point to consider is that some lines of credit charge a monthly or annual fee, or sometimes both. Then, there is one major downside to both home equity loans and HELOCs, and it is that your home serves as collateral. You can lose your home in case of default. Make sure you can make the on-time payments before you sign the loan agreement, regardless of how wonderful it may sound.
Home equity rates can be confusing, and knowing subprime lenders is here to help.
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