Home Equity Loans

Home Equity Loans

Equity (trade union) (Photo credit: Wikipedia)

Home Equity Loans

Paying a lot of interest on credit cards and other forms of expensive credit doesn’t make a whole lot of sense for those fortunate enough to have substantial equity in their homes.  Many people have a need to feel that there home is not at some kind of risk.  That’s understandable….even commendable.  If you are going to worry constantly about the possibility of foreclosure just don’t take out a home equity loan.  It isn’t worth it for you.

HELOC One Way to Go

A home equity loan could be a smart way to pay off high-interest debt or pay for home repairs. But consider carefully before taking out a home equity loan. If you are unable to make payments on time, you could lose your home. Home equity loans can be either a revolving line of credit or a lump sum. Revolving credit lets you withdraw funds when you need them. A revolving line of credit secured by your home is known as a HELOC (Home Equity Line of Credit).  It permits you to draw funds up to a predetermined limit whenever you need money.  There is usually a minimum monthly payment due each month with the option of paying off as much as you want or interest only if you choose.

The interest rate on a HELOC is usually lower than on a HEL but its rate fluctuates according to the prime rate, so there is more risk of rising interest. This risk is very real at this point in time.  This option is generally a good choice to meet ongoing cash needs such as tuition payments or medical bills.  Usually there are no closing costs for HELOC’s, but there may be an annual fee.

Lump Sum HEL Another Option

A lump sum (HEL) or Home Equity Loan is a one-time, closed end loan for a particular purpose, such as an automobile, remodeling or tuition. Apply for a home equity loan through a bank or credit union first. These loans are likely to cost less than those offered by finance companies.  With a HEL you may choose either a fluctuating adjustable rate tied to the prime rate or you may opt for a fixed rate.  HEL’s carry closing costs which you must also consider.  The term of the mortgage may be as short as 1 year or as long as 20 years.

Interest may be tax deductible, but check your own personal tax situation with a professional before relying on tax benefits you think may accrue.  Whether you opt for a HELOC or a HEL will have another important effect on your credit score.  A HEL is an installment loan which will help you if you need to add an installment loan to the “Types of Accounts” section on our credit report.  Even more important the outstanding balance on your HEL will have less effect on your debt to available credit ratio than adding to your revolving debt with a HELOC.  Installment debt is treated differently that way.

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After practicing law for 37 years Edward F. St. Onge, Sr. now devotes all his time to helping consumers achieve a high credit score with amazing speed. Learn the counter-intuitive secrets to credit scoring through his down to earth instructions backed by extensive knowledge of the laws and trends. All of the latest tricks and techniques that they don't want you to know now at your disposal. At last a level playing field for the consumer!

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