Home Equity Loans Rate | Deciding Between a Home Equity Loan and a Home Equity Line of Credit?
Many lenders aggressively advertise using home equity loans (HEL) and home equity lines of credit (HELOC) to consolidate unsecured debt. Using the equity in your home this way is basically a good idea.
But be aware that foreclosures are on the upswing. They’ve more than doubled in California over the past year. And since both options use your home as collateral for a loan, you may be putting your most valuable asset at great risk. The Federal Trade Commission warns “Borrowers Beware.”
A home equity loan (HEL) is a fixed interest lump sum loan. The lender expects you to pay off the loan in monthly installments over a specific period of time. That period could be 5, 10 or 20 years
A home equity line of credit (HELOC) is more like getting another credit card. You get a line of credit to draw on for a specific period of time. The lender expects you to pay down your debt each month as you would with a credit card. HELOCs usually have variable interest rates. At the end of the period, any outstanding balance is due.
Some HELs and HELOCs have interest-only payments during the initial years of the term that revert to principle and interest payments later. Others have interest-only payments with a balloon payment at the end of the term.
They both have the same basic benefits. Since your home is collateral, lenders offer lower interest rates than credit cards. HELs are about half as high as a credit card. HELOCs are usually a little higher than HELs. Another common benefit is that interest paid is deductible on federal and state taxes. Be sure to check with a qualified tax expert. These deductions have limits.
No matter how attractive HELs and HELOCs may sound, they are not for everyone. They’re usually not recommended for the elderly on fixed incomes, those with low incomes or poor credit ratings or those people who are just going to run up more debt after they pay off their credit cards. To be safe, you need to have more than enough steady income to cover the extra payments each month.
Be careful before jumping into any kind of second mortgage. Always get a second opinion and be sure you know what you’re doing. You do want to keep the roof over your head, don’t you?