Home equity loans and HELOCs — both of which are commonly called a second mortgage — allow you to borrow against the value of your home.
Many people use home equity products to pay for remodeling projects or to consolidate high-interest debts.
Home equity loans come with a fixed interest rate, fixed monthly payment, and fixed repayment timeline. This makes them a predictable option for borrowers who don’t like surprises.
HELOCs, on the other hand, come with variable rates and let you borrow as you need — they’re a form of revolving credit. In fact, they function a lot like a credit card, the main difference being that you’re using your home as collateral.
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Even if you have no desire to prolong your mortgage payments or add to the debts you have, there are plenty of good reasons to borrow against the equity in your home — commonly called a second mortgage.
Interest rates are typically much lower than other borrowing options, for example, which means you could be a lot better off if your alternatives are a personal loan or a credit card. Since the loans behind a second mortgage, home equity lines of credit (HELOCs) and home equity loans, use your home as collateral, they may also be easier to qualify for.
Another benefit of home equity loans and HELOCs is the fact that you can use the money however you want. Sure, you can use your loan proceeds to remodel your kitchen or add on a new family room, but you can also repair a leaky roof or consolidate high-interest credit card debt. Heck, you could use your home equity proceeds to book a luxury vacation to the Maldives if you want (although you definitely shouldn’t).
Home equity loans vs. HELOCs
But should you get a home equity loan or a HELOC instead? This is a question many homeowners ask as they try to figure out the difference — and which option might work best.
While both home equity products let you borrow against the equity you have in your home, they don’t work in the same way. The key to knowing which one is best for your needs is deciphering the details and understanding the pros and cons of each.
All about home equity loans
Home equity loans let you borrow against the equity in your home and receive your funds in a single lump sum. Loan amounts are typically limited by your loan-to-value ratio, a calculation that takes into account your home value minus your existing mortgage and limits your loan to about 80% to 90% of that balance — if you qualify.
Like personal loans, home equity loans come with a fixed interest rate and fixed repayment term. Because of this, you’ll also get a fixed monthly payment that doesn’t change during the life of the loan. In that sense, home equity loans are extremely predictable; you know how much you’re borrowing, how long you’ll pay it back, and exactly …read more
Source:: Businessinsider – Finance