Is a Home Equity Loan a Good Choice?
If you are a homeowner who has equity in your home, and you want to borrow money to pay for an important personal need, you have more than one option.
Types of Home Equity Loan
You can take out a:
- Cash-out refinance of your current mortgage, borrowing enough to accomplish your goals.
- Second mortgage to get the money you need.
- Home Equity Line of Credit (HELOC)
Second Mortgages
If a second mortgage is a better choice for you than refinancing your first mortgage, you have two main options.
1. Standard Mortgage- A standard second mortgage is also is called a traditional Home Equity Loan (HEL). In a standard mortgage loan, you borrow a certain amount of money and pay it back over a fixed number of years, at an interest rate that can be fixed or variable. This loan disburses the cash to you when the loan closes and you can do with the money as you please, whether it is to pay for home improvements, college costs, or to consolidate debt. Once the loan closes, your payment obligations begin. This loan is a good choice when you need a set amount of money for a specific purpose.
2. Home Equity Line of Credit (HELOC) - A HELOC is a revolving line of credit in which your home serves as collateral. Your lender issues you a credit card or checkbook and you can make purchases as you see fit and as your needs arise, up to the maximum dollar amount approved. This makes the HELOC a much more flexible product than the standard second mortgage.
Home Equity Loan Risks
Home equity loans are not risk-free. Many Americans have discovered that the drop in home values left them owing more on their home than it is worth. The drop in values happened after many people aggressively borrowed against the equity they had in their homes. Don’t put your home at risk, by drawing on your home’s equity without good cause and plenty of forethought.
You should choose the type of loan that best fits your specific financial needs. Bills.com makes it easy to compare mortgage offers and different loan types. Visit the Mortgage Refinance Saving Center, to find a loan that meets your needs.