Home Equity Loan

The next time you undertake a project or have some other need for a large amount of cash, consider getting a home equity line of credit. This may be the best, most convenient, and most affordable type of loan available to you. Specifically, there are four reasons to pursue a home equity line of credit: the interest rate is low, you pay for only what you need, the monthly payments are lower, and the closing costs are minimal compared with those for other types of loans.

Interest Rate: A home equity line of credit is a second mortgage on your home, but even though that sounds scary, its interest rate is usually only slightly greater than the prime rate. This makes it a more attractive source of financing than credit cards or other types of loans.

Pay Only for What You Need: when you take out a home equity line of credit, you don’t have to use money equal to the full value of your house. Just use whatever amount you need, and pay interest only on that amount. You’ll still have the security of knowing that money is available should your plans change and you need it in the future. With other types of loans, you might end up borrowing more money than you need, just to be on the safe side, but then you’ll be paying interest for money you’re not even using. A home equity loan provides much more flexibility and convenience.
Smaller Payments Each Month: With a home equity loan, your monthly payments are lower, because they cover only the interest (and, as described above, only on the amount of money you’re actually using) – not the premium. This means that in the “draw period,” which can last for many years, you’ll have minimal monthly payments, which frees up cash for your other expenses. But of course, don’t forget that once the draw period has ended, you’ll either owe a large sum of money all at once (the so-called balloon payment), or you’ll need to refinance the loan, presumably with higher monthly payments that include the principal as well as insurance.

Minimal Closing Costs: A home equity line of credit has lower closing costs and fewer (and smaller) fees than do other types of loans. Depending on the size of your loan, this could be hundreds or possibly even thousands of dollars saved.

Never sign a home equity line of credit agreement without first reading all the fine print and learning exactly how much the loan is going to cost you. Also, be sure to shop around, as different lenders may present wildly different quotes, and you can save yourself a lot of money by carefully comparing those offers to identify the one that’s best for you and your specific financial situation.