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Three Options to Consider When Choosing Your Home Equity Loan

[Feb 9, 2009.]


About a month ago, we covered the basic differences between a traditional second mortgage and a home equity line of credit. If you missed the last post, you can find our brief comparison on this page. But, if you're still struggling to make a decision and stuck between each of these loans, here are three simple things every homeowner should consider to help get you started.

1. Which Do You Prefer: Stability or Flexibility?
"Easy, I want stability and flexibility!" Unfortunately, most homeowners will have to make the tough decision and choose which matters most. Home equity lines of credit are much more modern loans and resemble the flexibility of a typical credit card account. As a result, they also carry less stability since the interest rate is typically adjustable.

On the other hand, traditional home equity loans are much more predictable and stable because of their fixed balance and payment. Since mortgage lenders view these loans as less of a risk, they can then offer fixed interest rates for the life of the loan. What most homeowners discover is that while a HELOC offers more flexibility, the traditional home equity loan makes up for it with long term stability.

Homeowners need to keep in mind that when shopping for either of these loans, the advertised interest rate for either of these loans could be quite similar. But, remember that these interest rates may just be "teaser rates". Especially among HELOCs, it is not uncommon for the advertised rate to be significantly lower than the loan's actual term rate.

2. How Would You Like Your Equity: One Lump Sum or As A Credit?
One particular difference between each of these loans is how the funds are dispersed once the loan is acquired. In a traditional home equity loan or second mortgage, the entire balance of the loan is transferred to the borrowers account once the loan funds. With a HELOC on the other hand, the borrower is given access to a line of credit up to a set maximum amount. The borrower is typically given a check book and debit card, and can now access their equity at any time.

As a result, homeowners should consider how exactly they need their money. For individuals planning to pay off medical bills, consolidate various debts, or make one time home improvements, a traditional home equity loan can easily meet these needs.

However, if a homeowner is expecting ongoing expenses such as recurring medical bills, ongoing home improvements, college tuition, and other predictable expenses, a HELOC may be the better option.

3. Evaluate Your Long Term Goals vs. Short Term Needs
Ask yourself how you plan on paying off each of these loans. While most homeowners prefer to eliminate any existing debt on their home, some may actually prefer to keep a considerable "safety cushion" just in case. With a HELOC, the flexibility allows homeowner's to keep their equity within arms reach. But, in the case of a traditional home equity loan, once the loan is paid off [either partially or in full], the balance is permanently reduced.

For those who prefer the more traditional route, a home equity loan might make more sense as it can help to save money on interest payments, and also prevent the temptation to continually tap into one's equity. In either case, both home equity loans are great options and will largely depend on an individual's exact needs.


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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