What is Home Equity?
Home Equity is the current market value of your property (home) minus the remaining mortgage balance.
How You Can Use the Equity in Your Home to Save On Hefty Interest Charges
People have been using home equity for a variety of reasons such as renovation, investing in other real estate property, refinance and even to consolidate debt. In order to facilitate homeowners, lenders have introduced a number of flexible home equity products. The option you choose depends on the amount of equity that you have presently built in your home as well as your own personal reasons for acquiring the extra cash.
HELOC or Home Equity Line Of Credit
Home Equity Line Of Credit, also known as HELOC is becoming a potential source of extra cash for a growing number of homeowners. But utilizing the equity of your home like any other financial decision should be done very cautiously.
Perhaps the best thing about HELOC is that it works more like a credit card. A certain amount of credit is made available for a limited time period – it can be 5 or 10 years followed by a repayment period. Most homeowners opt for HELOC if they need to borrow smaller amounts of money over a longer period of time. Another important thing to note here is that HELOC has lower interest rates.
You would have to provide your credit history to get the best possible interest rates.
While HELOCS are more flexible than home equity loans, they can get tricky because the interest rate might change over time. The interest rate is tied to the primary lending rate; however it can increase if the variables change significantly.
Home Equity Loans
Most people confuse HELOC with home equity loans, but they are two entirely different things. Unlike HELOC, home equity loans allow you to receive funds in a lump sum amount. Another good thing is that the interest rate and monthly payments are fixed, so you can plan your budget accordingly.
Both home equity loans and HELOCS are treated as second mortgages, but HELOC should be considered more like a line of credit. Remember that home equity loans are a better option if you need money for one large onetime expense and you want to know exactly how much money is needed.
Because HELOCs and home equity loans are both second mortgages, you can borrow up to 80% of the equity value. However before you apply for a second mortgage, you should figure out whether or not you can make payments on both mortgages at the same time.
It makes more sense to acquire a second mortgage from a bank if you have exceptional credit history. Private lenders do offer HELOCS and home equity loans but they are more likely to charge a higher interest rate. Remember, higher the equity, the lower the interest rate.
The bottom line is that you should do your research before deciding which loan option would work best for you. You can compare and find the best home equity loans with great interest rates