The pros and cons of home equity loans
NEW YORK, Feb. 16, 2022 (GLOBE NEWSWIRE) — A home equity loan and a home equity line of credit (HELOC) are two entirely different products, each with their own advantages and disadvantages. Ultimately, the pros and cons will vary from person to person and may also depend on current tariffs. You should check the latest interest rates on lenders’ websites e.g. B. Discover current home equity interest rates.
Home Equity Loan Pros and Cons
Home equity loans offer a fixed interest rate, so the monthly payments don’t change and stay the same for a set period of time. Home equity loans are typically used to consolidate debt, make home improvements, or finance one-off large expenses. The terms of home equity loans are typically 10 to 30 years.
- Fixed interest rates, meaning the interest rate and the amount paid out on home equity loans remain the same throughout the life of the loan.
- Borrowers receive the funds at closing in a lump sum that can be used for a variety of different needs such as home improvement, debt consolidation, weddings, etc.
- Home equity loans are a lump sum, while HELOCs offer funds as needed.
- Because the rates are fixed, the rate can be higher than the initial variable rate of HELOCs
HELOC Pros and Cons
A HELOC works similar to a credit card. The homeowner is given a credit limit (usually based on their equity) and can withdraw as much as they wish during a drawing period. Typically, HELOCs have a draw period of 5-10 years and payback periods of up to 20 or 30 years.
- Owners only pay interest on what they draw.
- Generally, initial interest rates start out lower than home equity loans, but they could go up.
- The loan turns over when the principal balance is repaid, providing flexibility to access funds when needed. The principal balance is the amount owed before interest.
- Can be used for a variety of different reasons, similar to home equity loans.
- Interest rates are variable, not fixed, which means they can go up, as can the monthly payment amount.
- In general, HELOCs can be riskier for those who lack financial discipline due to their variable interest rates and payment amounts
- Revolving credit means it is possible to roll over the balance to the next month and the owner can choose to pay a minimum amount instead of the balance. This means that interest is accrued on top of the principal balance, which can add up over time.
Home equity loans are often used for large, one-time expenses and home renovations, while HELOC loans are often better suited for those who need an additional line of credit at a relatively low interest rate.
Home equity loans and HELOCs can be useful depending on each homeowner’s circumstances. It’s important to understand that both use a home as collateral and that it never hurts to consult a licensed financial advice professional.
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