Is a Home Equity Loan Right for You?
Home equity loans are big news these days, but are they right for
you? First, before you can decide, you need to know the facts about
home equity loans. Home equity loans come in two different forms:
closed-end home equity loans and home equity lines of credit.
Closed-end home equity loans are very similar to your home mortgage:
a specific amount of money is loaned to you and you’re required to
make scheduled monthly repayments of principal and interest. These
loans are often thought of as traditional second mortgages. The date
you must repay the loan is set when you borrow the money. Often
interest rates are fixed.
In contrast, a home equity line of credit is more like a credit
card. Home equity lines of credit allow you to use as much (or as
little) of the credit line as you like, up to an approved dollar
amount. You can withdraw money when you want to use it. Typically
you have between five and 20 years to access this credit line. Once
this period has ended, you must stop borrowing and repay the
principal and interest. You may have between 10 and 20 years to
repay, or you may have a balloon payment. Balloon payments require
you to pay the principal in one lump payment. Often the credit
interest rate is adjustable and changes as the economy changes.
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