[ad_1]
Property owners often wonder how they can use the value of their home to access low-interest financing. A loan or a home equity line of credit are two options available to you. Check out some of the differences below to find out which one will be a better fit for your needs.
Home Equity Loan (HEL)
A loan tapping into the value of your home is a good way to borrow money. This option allows you to get a fixed amount and get a lump sum amount. The amount you receive is based on the value of your home, payment terms, verifiable income and credit history. You can get it at a fixed rate, fixed tenure and even with a fixed monthly installment. In addition, interest payments are 100 percent tax deductible.
home equity line of credit (HELOC)
With a home equity line of credit, you don’t get all of your money at once. Instead, you open a revolving credit, which allows you to access the money as you need it. Your home is used as collateral for opening a credit account. Companies approve this type of account based on the appraised value of the property plus the current balance of the existing mortgage. Some consider income, debt ratios and credit history.
Unlike a HEL, on a HELOC you withdraw funds as needed over a period of time, usually five to ten years. Plans vary and you may have special checks or cards to access your funds. Depending on your account, you may be required to borrow no less than a specified amount each time you access it. You may also be required to maintain a minimum balance. Some plans also require a specific early withdrawal.
After the “draw period” is over, some HELOC providers will allow you to renew the terms of the account. Not all lenders allow you to renew the plan. Also, after the “draw period” is over, you enter the “repayment period”. Your lender may require you to pay the full amount at this time. Others allow you to make installments.
how are they different
While a HEL and a HELOC allow you to tap into the value of your property to gain access to financing, there are two key differences. That is the interest rates and repayment terms.
With HEL you get a fixed interest rate. This means that you know what your interest rate is going to be on a month-to-month basis. This also ensures that your payment is fixed, making it easy to budget each month.
However, home equity lines of credit usually have an adjustable rate. This means that the monthly interest payment may shift based on the index. Lenders traditionally add a margin of a few percentage points to the prime rate. You should ask the lender which index is used, which margin is charged, how often the rate adjusts, and what is the cap and floor on the rate.
Since the interest is adjustable, the monthly installments fluctuate. Also, you may be liable to pay only the monthly interest during the draw period, not paying the principle until the repayment period begins.
[ad_2]