Your home's value has grown enormously in recent years, so you've gained a lot of equity on your home. What's the best use of this source of wealth? How about getting a Home Equity Loan or opening a Home Equity Line of Credit to pay off your credit card debts or pay for those home improvements that you've been planning for the longest time?
Home Equity Loan comes in a lump sum, so it is better suited to pay for one-time purposes, such as a new roof, high-priced purchases such as a car or a vacation home, back-owed medical expense, or debt consolidation.
Home Equity Line of Credit (HELOC) has a revolving balance, so a HELOC is a good fit for recurring expenses, such as education expenses, living expenses while unemployed, or a multi-stage home remodeling project. HELOC is also inexpensive, relatively easy to obtain.
Take the Next Step - Inquire WEI about our Home Equity Loan -or- Home Equity Line of Credit (HELOC) products. We offers superb Home Equity Loan and HELOC products customized to your needs. Email us at info@weicorp.com or give us a call at (240) 243-9000 or Toll Free (800)WEI-9785.
HOME EQUITY LOAN vs. HELOC
- Do I need the money in a lump sum, or in several installments?
- Is it for a long-term purpose, or a short-term purpose?
- How big a monthly payment can I handle?
- Would a line of credit tempt me to use the money carelessly?
- Does a variable rate bother me?
ABOUT HELOC
- What is HELOC?
- Why do home owners typically open HELOC?
- What are the disadvantages of HELOC?
- What are the advantages of HELOC?
- What are the typical terms and conditions of HELOC?
- How to shop for HELOC?
- Checklist when opening a HELOC.
HOME EQUITY LOAN vs. HELOC
1. Do I need the money in a lump sum, or in several installments?
If you need it in a lump sum, lean toward getting a home equity loan. If you need the money in installments, lean toward getting an equity line of credit.
2. Is it for a long-term purpose, or a short-term purpose?
If the money is to be spent on something that will last a long time, like a roof or a car, an equity loan might be better. If the money is to be spent on something that won't last long, like a semester in college or a wedding and reception, think about getting an equity line of credit.
3. How big a monthly payment can I handle?
A home equity loan requires you to pay principal and interest every month for the life of the loan. A home equity line of credit allows you to pay just the interest for several years, if that's what you want to do. It's a whole other question whether it's a good idea to pay only the interest, and not the principal, for a long time.
4. Would a line of credit tempt me to use the money carelessly?
Naturally, if you answer this in the affirmative, you should consider getting a home equity loan, because you pay off the principal and interest over time, and it's not a revolving credit account.
5. Does a variable rate bother me?
A home equity line of credit has an adjustable rate that most likely changes every time the Federal Reserve raises or drops the federal funds rate. If you don't like the idea of having a rate that could rise every time the Fed meets, consider getting a home equity loan, which has a fixed rate.
ABOUT HELOC
1. What is HELOC?
HELOC stands for home equity line of credit, or simply "home equity line." It is a loan set up as a line of credit for some maximum draw, rather than for a fixed dollar amount. With a HELOC, you receive the lender’s promise to advance you up to specific amount with adjustable interest rate. In plain terms, this means your interest rate will change over time if you borrow from the HELOC. You can draw on the line by writing a check, using a special credit card, or in other ways set by the lender.
2. Why do home owners typically open HELOC?
HELOCs are convenient for funding intermittent needs, such as paying off credit cards, making home improvements, buying cars, or paying college tuition. You draw and pay interest on only what you need with relatively low upfront costs.
3. What are the disadvantages of HELOC?
The main disadvantage of the HELOC is its exposure to interest rate. All HELOCs are adjustable rate mortgages (ARMs) that are tied to the prime rate. Changes in the market impact HELOC's interest rates. Typically HELOC has a guaranteed introductory rate that holds for a number of months set by the lender. However, some HELOCs are convertible into fixed-rate loans at the time of a drawing. This is a useful option for borrowers who draw a large amount at one time.
4. What are the advantages of HELOC?
A HELOC can be an excellent financing tool, if it is used properly. Many homeowners use HELOC as a way to consolidate high interest credit card debts or to use it when need a sum of cash. When you need cash in a hurry for a short period of a HELOC can be very useful. One more reason that makes a Home Equity Line of Credit so popular is that interest paid is usually deductible under federal and most state income tax laws unlike interest paid you paid on credit cards or other existing revolving debt accounts.
5. What are the typical terms and conditions of HELOC?
HELOC has a draw period, during which the borrower can use the line, and a repayment period during which it must be repaid. Draw periods are usually 5 to 10 years, during which the borrower is only required to pay interest. Repayment periods are usually 10 to 20 years, during which the borrower must make payments to principal equal to the balance at the end of the draw period divided by the number of months in the repayment period. Some HELOCs, however, require that the entire balance be repaid at the end of the draw period, so the borrower must refinance at that point.
You are only required to pay the interest until the end of the draw period. At the end of the draw period, you’ll have to do one of the following:
- Pay back the full principal HELOC amount borrowed
- Pay a HELOC balloon payment
- Pay based on a loan amortization schedule.
6. How to shop for HELOC?
Shopping for a HELOC is different from shopping for a standard mortgage. A HELOC is a line of credit, as opposed to a loan for a specified sum, and it is always adjustable rate.
The good news is that HELOCs are easier to shop for. The major reason is that important features are the same from one lender to another. The critical feature of a HELOC that is not the same from one lender to another, and which should be the major focus of smart shoppers, is the margin. This is the amount that is added to the prime rate to determine the HELOC rate.
If the HELOC will be used to meet future contingencies rather than to refinance an existing mortgage, the shopper needs to know whether there is a minimum draw at closing, or a minimum average loan balance.
Last and least important are the fees. Upfront fees are the same types as on standard mortgages, except that HELOC lenders seldom charge points, and third party fees tend to be small and are often paid by the lender. In addition, there are some uniquely HELOC charges that you should factor in. These include an annual fee, and a cancellation fee which is usually waived if the account stays open for 3 years.
7. Checklist when opening a HELOC.
Important HELOC items to be aware of:
- Introductory rate and period
- Margin
- Minimum draw
- Required average balance
- Upfront lender fees
- Upfront third party fees
- Annual fee
- Cancellation fee
