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How To Choose Between A Fixed Rate Or Adjustable Rate Home Equity Loan

[Jun 8, 2009.]

 

In the case of home equity loans, a borrower's preference for an adjustable rate or fixed rate will determine the type of home equity loan they obtain. The two basic home equity loan options are a traditional second mortgage and a home equity line of credit. While each loan type differs in many other ways, homeowners need to decide if they are more comfortable with an adjustable rate mortgage, or its fixed rate counterpart. Below you will find a few considerations to keep in mind when deciding on your next home equity loan.

Home Equity Loans vs. Home Equity Lines of Credit
A fixed rate home equity loan is a traditional second mortgage with a set balance and monthly payment. On the other hand, a home equity line of credit is a type of credit line based on the equity of your home. Additionally, the interest rates for most HELOCs adjust every month after a short fixed rate introductory offer.

How Do You Plan On Using Your Home's Equity?
Like most other mortgages, evaluating your current needs will help determine which type of interest rate is best for you. With home equity loans, your needs will also determine which type of home equity loan is better suited for you. For a one time fixed lump sum balance, a traditional second mortgage is an excellent option to consolidate debt, payoff large one time expenses, and eliminate the need for private mortgage insurance. For recurring expenses such as ongoing home improvements, medical bills, and business investments, HELOCs provide access to your home's equity much like a typical credit card. However, this added flexibility comes at the price of an adjustable interest rate. To help compare the differences in fixed price offerings to adjustable rate home equity loans, borrowers should keep an eye on the Federal Prime Rate as the basis of the adjustable rate trends.

Can You Handle An Adjustable Rate?
Adjustable rates do carry a bit of uncertainty and risk, but for many homeowners, it is still the best option. Especially with interest rates at their current levels, borrowers now have an opportunity to obtain HELOCs at a decent price. And with the Federal Prime Rate and Funds Target Rate set at historic lows, the adjustable rate alternative becomes even more tempting.

In the end, homeowners need to be realistic about their debt and accurately estimate the time it will take to payback their debts. If you think you can pay off your home equity debts within a matter of a few years, the dangers of an adjustable rate mortgage may actually be negligible. But, if you know it will take longer to pay back your debts, or a bit unsure about your future income stability, it may be best to avoid any type of adjustable rate loan. Especially in this economic climate, the combination of uncertain interest rates and declining home equity values can easily become a serious problem. For more detailed information on this issue, speak to a home equity loan specialist by using our site's directory found here.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.

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