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Home Equity Line versus Home Equity Loan
By Sheryl Landrum
CMR Columnist
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When homeowners need cash, they often consider getting a home equity line of credit or a home equity loan rather than refinancing their first mortgage. In order to choose the right mortgage product for you, you need to know the differences between a home equity line and a home equity loan.
The ABCs of a home equity line:
- Home equity lines of credit (HELOCs) are like revolving lines of credit. Once an amount is established, you can borrow and pay it back at any time and you only pay interest on the amount you draw (borrow).
- HELOCs are interest only loans based on a variable rate, usually the prime rate which is currently 8.25%.
- Because the interest rate is variable, your mortgage payment can go up or down depending on the prime rate.
- HELOCs are now allowing borrowers to fix all or a portion of their home equity lines to a fixed interest rate.
- Often you can get a home equity line of credit for low or no closing costs.
The ABCs of a home equity loan:
- Home equity loans are fully amortized loans meaning your mortgage payment will include interest and principle.
- Home equity loans are amortized over 30 years but due in 15 years meaning you will have a balloon payment at the end of the term or you will need to refinance.
- Home equity loans are a fixed loan amount at a fixed interest rate creating a set mortgage payment making it easy to budget.
- Home equity loans are also offered at low or no cost.
Each borrower has different preferences and needs. But before you make a final decision on which mortgage product is best for you, talk to your trusted lender, accountant, or financial planner. Now, go pick up that phone and get started!
About the Author
Sheryl Landrum is a senior loan officer with First Capital Mortgage of San Diego, California.
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