Types of Home Equity Loans
Types of Home Equity Loans Fundamentally, there are two types of
home equity loans.
1.Home Equity Line: When you get a home equity line, you obtain
the right to draw money, whenever you want, over a certain
period of time. You only pay interest on the amount you borrow.
You may borrow, pay off and borrow again against the line of
credit. You typically access the line with a check or credit
card. 2. Second Mortgage (home equity loan): When you get a
second mortgage, you obtain a lump sum of money. The interest
rate and monthly payments are fixed. Before deciding which type
of loan you want, consider how you'll use the money. If you need
funds for a single expense, such as a room addition, remodeling,
etc., you'll want to strongly consider a fixed-rate, second
mortgage. You receive one lump sum at the beginning of the loan
term. You pay it back in equal, monthly installments. The
certainty of a fixed interest rate and equal monthly payments
make the fixed-rate, second loan very attractive. Will this type
of loan be less expensive compared to an adjustable rate, home
equity line? There is no way to know with certainty. One would
have to be able to predict interest rates with accuracy.
Consider one of the reasons why adjustable rate loans were
invented: to shift interest rate risk from the lender to the
borrower. When market interest rates rise above the interest
rate on your fixed-rate mortgage, the lender is effectively
losing money on your mortgage and you're getting a bargain.
Lenders wanted a way to protect themselves from this
situation--thus the adjustable-rate mortgage. If you need
periodic amounts of money over time, for a child's education
tuition, for example, a home equity line may be ideal. You can
borrow only the amount you need, when you need it. These loans
carry adjustable (ARM) rates, but some banks allow you to
convert a portion of your loan to a fixed-rate second. You may
pay a premium for the convenience of an equity line, including a
transaction fee for each draw and an annual fee if you draw or
not. Deciding in advance which type of loan is best for you
helps when comparing the expense of various loans. Since the APR
for a fixed-rate second is calculated differently compared to a
home equity line, APR comparisons can be difficult when
comparing a fixed-rate second to a home equity line. APRs of
fixed-rate seconds account for points and other closing charges.
APRs for home equity lines don't account for points and other
closing costs. When comparing the same types of loans (apples to
apples), APRs are much more meaningful. Interest may be
fully deductible. Consult your tax advisor regarding your
particular situation. ** Under certain circumstances, some loan
programs let you convert part of your home equity line to a
fixed-rate, home equity loan.
_________________________________________________________________
____ M&M Resources Unlimited, Inc.
www.mmresourcesunlimited.com 1577 Ridge Road West, Suite 119
Rochester, NY 14615 Office: (585) 865-0950 Fax: (585) 865-3202
Toll Free: 1-800-937-2350 Licensed Mortgage Banker/NYS Banking
Department