Expert explains differences between home equity loans and a HELOC
InvestigateTV – Home values are going up, which means home values are going up too. If you’re planning a home improvement project, this equity could help with the math.
Now is a great time if you’re looking to pull equity out of your home to refinance, and there are two ways you can do that: a home equity loan or a HELOC.
A home equity loan is a fixed amount of money, usually for a fixed period of time with a fixed amount of interest.
“So if you’re a person who really likes to plan and know exactly what your payments are going to be and what your interest rate is going to be, home ownership might be better for you,” said Cherry Dale, a financial coach with Virginia Credit Union.
Dale said the payback period is usually a fixed period, typically between five and 20 years. The interest rate on this type of loan is also much lower than a credit card since your home is the collateral. If you default, your home is at risk.
She said a HELOC, or home equity line of credit, has a variable interest rate.
“…But interest rates are floating, which means they can go up and down depending on what’s happening in the market. Now, right now, interest rates are pretty low,” Dale noted.
However, the interest you owe could go up a few years from now depending on what the market is doing, and there’s one more thing you should know. Typically, you are tied to a time frame for a HELOC. At the end of that time, you owe whatever is left, so it can end up looking like a balloon payment.
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