Mortgage and Refinancing Information Channel:
We would like to thank the local libraries, schools, and universities for recommending students to visit us when doing research on any of our information topics.
Decision Time: Home Equity Loan or Home Equity Line of Credit?
Home equity loans and home equity lines of credit continue to grow in popularity. According to the Consumer Bankers Association, during 2003 combined home equity line and loan portfolios grew 29%, following a torrid 31% growth rate in 2002. With so many people deciding to cash in on their home's equity value, it seems sensible to review the factors that should be weighed in choosing between out a home equity loan (HEL) or a home equity line of credit (HELOC). In this article we outline three principal factors to weigh to make the decision as objective and rational as possible. But first, definitions:
A home equity loan (HEL) is very similar to a regular residential mortgage except that it typically has a shorter term and is in a second (or junior) position behind the first mortgage on the property - if there is a first mortgage. With a HEL, you receive a lump sum of money at closing and agree to repay it according to a fixed amortization schedule (usually 5, 10 or 15 years). Much like a regular mortgage, the typical HEL has a fixed interest rate that is set at closing for the life of the loan.
In contrast, a home equity line of credit (HELOC) in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you can borrow up to - not a check. HELOC funds are borrowed "on demand" and you pay back only what you use plus interest. Depending on how much you use the HELOC, you will have a minimum monthly payment requirement (often "interest only"); beyond the minimum, it is up to you how much to pay and when to pay. One more important difference: the interest rate on a HELOC is adjustable meaning that it can - and almost certainly will - change over time.
So, once you've decided that tapping your home's equity is a smart move, how do you decide which route to go? If you take time to honestly assess your situation using the following three criteria, you will be able to make a sound and reasoned decision.
1. Certainty or Flexibility: Which do you value the most?! For many borrowers, this is the most important factor to consider. Your home is collateral for either type of home equity borrowing and, in a worst case scenario, it could be seized and sold to satisfy an outstanding unpaid loan balance. People do remember the double-digit interest rates of the early 1980's and, for many, the mere prospect of interest costs on a variable-rate home equity line of credit rising rapidly beyond their means is reason enough for them to opt for the certainty of a fixed rate HEL.
>From the borrower's perspective, "certainty" is the main virtue of a fixed-rate home equity loan. You borrow a specific amount of money for a specific period of time at a specific rate of interest. You repay the loan in precise monthly installments for a precise number of months. For many, knowing exactly what their future obligations will be is the only way they can borrow against the equity in their home and still sleep at night.
A home equity line of credit, in contrast, is short on certainty but long on the virtue of flexibility. With a HELOC you borrow funds on an irregular schedule that meets your needs at adjustable interest rates that can change quickly. Loan repayment is also flexible: you typically are required to make only relatively small "interest-only" monthly payments on a HELOC. However, you have flexibility to make any size payment above the interest-only minimum or payoff the loan at your will.
2. Do you need money for a one-time, lump-sum payment or will your cash needs be intermittent over several months or years? Home equity loans are best suited for one-time payment needs (a good example is consolidating debt by paying off several high-rate credit cards at one time). This is because at the time you close on a HEL, you will be provided with a lump-sum check in the amount you've borrowed (less closing costs). While it may be empowering to have that much money handed over to you, be humbled by the fact that you will immediately begin incurring interest costs on the entire balance.
When you close on a HELOC, on the other hand, you will be given a checkbook (or debit card) that you use only as needed. So, for instance, if you're embarking on a multiyear home improvement project for which you'll be writing checks at varying times, a HELOC might be best. Similarly, a credit line is probably best for paying sporadic college expenses. Interest on a HELOC is only charged from the time that your HELOC checks clear the bank and only on amounts actually disbursed?not the value of the entire credit line.
3. Do you possess sufficient financial self-discipline for a HELOC? Financially-disciplined borrowers can have the best of both worlds?almost. By taking out a HELOC but paying it back according to a self-imposed fixed amortization schedule they can enjoy both the flexibility of borrowing cash only as needed and the certainty of a fixed repayment schedule. HELOCs are typically more efficient in terms of lower closing costs and a lower initial interest rate. Also, a HELOC may be somewhat easier for borrowers to qualify for since the low, flexible monthly payments mean debt to income ratios that loan officers look at are more favorable for the borrower.
The one big factor not within the HELOC borrower's control is the interest rate (see #1 above). Interest rates will almost certainly change over the life of a HELOC. This means that a self-imposed "fixed" amortization schedule may need to be periodically refigured. Numerous internet sites provide free, powerful mortgage calculators that can assist you in preparing updated amortization schedules whenever needed. Some lenders are also meeting borrowers' demand for greater certainty by providing HELOC products that can be converted (for a fee) into a fixed rate loan when the borrower elects.
As mentioned earlier, HELOCs are much like credit cards and the similarity extends to spending temptation. If you are a person who has trouble keeping credit card debt under control and you haven't taken steps to change habits, then a HELOC probably isn't a smart choice.
You might be wondering which home equity product most people actually choose. According to the Consumer Bankers Association 2002 Home Equity Study, home equity lines of credit account for 28% of consumer credit accounts followed by personal loans (23%) and regular home equity loans (16%). In terms of dollar value, home equity credit accounts (HELs and HELOCs together) represent a full 75% of consumer credit portfolios with HELOCs having a 45% share of the market and HELs a 30% share. Of course, the popularity of HELOCs may subside if interest rates continue to rise.
Whichever home equity product you decide on be certain to shop for the best deal possible. The market is extremely competitive and there are many non-traditional options, including on-line lenders and credit unions, which should be considered in addition to your local bank.
About The Author
Tim Paul has more than 25 years executive financial management experience. His recent area of focus has been to develop and catalog proven strategies for financially savvy persons to get the most from their home equity credit lines. His website is www.sagetips.com.
MORE RESOURCES updated Thu. February / 27 / 2020
As mortgage rates remain near three-year lows, here are 5 questions to ask yourself before you refinance your mortgage - msnNOW
As mortgage rates remain near three-year lows, here are 5 questions to ask yourself before you refinance your mortgage msnNOW
Mortgage recast: Lower your mortgage payment without refinancing | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
Mortgage recast: Lower your mortgage payment without refinancing | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
The lowest mortgage rates in nearly 50 years? | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
The lowest mortgage rates in nearly 50 years? | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
Weekly mortgage refinance applications spike 15% as interest rates plunge to lowest in nearly 4 years - CNBC
Weekly mortgage refinance applications spike 15% as interest rates plunge to lowest in nearly 4 years CNBC
Is it time to refinance your mortgage? KOMO News
Mortgage Rates Expected To Fall Further As Investors Flee To Bonds Over Coronavirus Fears - Bankrate.com
Mortgage Rates Expected To Fall Further As Investors Flee To Bonds Over Coronavirus Fears Bankrate.com
How Many Times Can You Refinance a Mortgage? Motley Fool
The High Cost Of Not Getting A Low-Interest Mortgage Bankrate.com
10-Year Refinance Rates | Compare rates today Bankrate.com
15-Year Refinance Rates | Compare rates today Bankrate.com
20-Year Refinance Rates | Compare rates today Bankrate.com
30-Year Refinance Rates | Compare rates today Bankrate.com
Right now would be a good time to refinance your mortgage Tampa Bay Times
The Mortgage Rate-Coronavirus Connection Explained Bankrate.com
Mortgage rates hold steady despite strong economic reports The Washington Post
Should you refinance your mortgage? WTNH.com
Guide To FHA Streamline Refinancing Program Bankrate.com
How a Home Appraisal Works NerdWallet
U.S Mortgage Rates Rise for the First Time in 4-Weeks Yahoo Finance
Mortgage rates today, February 18, 2020, plus lock recommendations | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
Mortgage rates today, February 18, 2020, plus lock recommendations | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
What is a cash-out refinance and how does it work? Fox Business
How to refinance a mobile home in 2020 | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
How to refinance a mobile home in 2020 | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
Is It a Good Idea to Refinance Your Student Loans? HowStuffWorks
The Daily Shot: Mortgage Refinance Activity Highest Since 2013 Wall Street Journal
The end of the mortgage refi boom? HousingWire
Mortgage rates today, February 19, 2020, plus lock recommendations | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
Mortgage rates today, February 19, 2020, plus lock recommendations | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
Mortgage Rates Are at 3-Year Lows—Here Are 5 Questions to Ask Yourself Before You Refinance - Realtor.com News
Mortgage Rates Are at 3-Year Lows—Here Are 5 Questions to Ask Yourself Before You Refinance Realtor.com News
Washington DC News, [BC-MCT-BUSINESS-BJT] Daily Inter Lake
How much is a mortgage? | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
Mortgage Mistakes to Avoid CapeCod.com News
Urban Institute: Reverse Mortgages Used Far Less than Other Equity Tapping Options - Reverse Mortgage Daily
Urban Institute: Reverse Mortgages Used Far Less than Other Equity Tapping Options Reverse Mortgage Daily
Buying a house in 2020? Here's who you're up against The Mortgage Reports
Military Debt Consolidation Loans And Alternatives Bankrate.com
Quicken Halts One Reverse Mortgage Operations, Shifts Focus to Rocket Mortgage - Reverse Mortgage Daily
Quicken Halts One Reverse Mortgage Operations, Shifts Focus to Rocket Mortgage Reverse Mortgage Daily
TRANSACTIONS: GCP Capital Group arranges $102850000 in aggregate financing Real Estate Weekly
Jumbo Loan Limits By State Bankrate.com
Coronavirus watch, earnings, new home sales: 3 things to watch for in the markets on Wednesday - CNBC
How to refinance your mortgage and save money every month Business Insider
How Long Does It Take To Refinance A Mortgage? Bankrate.com
Why It's Risky To Put Off Your Mortgage Refinance Bankrate.com
The Best Mortgage Refinance Companies for 2020 | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
The Best Mortgage Refinance Companies for 2020 | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
5 things I've learned from refinancing my mortgage Business Insider
What to know before refinancing your home loan The Washington Post
What Is Mortgage Refinancing? Motley Fool
Refinance or not? Getting a better deal isn't a slam dunk, but low rates offer compelling choices - AZCentral
Refinance or not? Getting a better deal isn't a slam dunk, but low rates offer compelling choices AZCentral
5 Biggest Myths About Mortgage Refinancing Bankrate.com
New home sales soar while inventories plummet MultiBriefs Exclusive
Refinancing Boom Fuels Mortgages to Postcrisis Record The Wall Street Journal
Mortgage rates haven’t been this low since 2016 — here’s how to decide whether to refinance your home loan - MarketWatch
Mortgage rates haven’t been this low since 2016 — here’s how to decide whether to refinance your home loan MarketWatch
5 Questions to Ask Before You Refinance Your Mortgage HowStuffWorks
Should you refinance your mortgage right now? | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
Should you refinance your mortgage right now? | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
4 reasons to refinance your mortgage at a lower interest rate Business Insider
When does refinancing into a 15-year mortgage make sense? The Philadelphia Inquirer
Pros and Cons of a Cash-out Mortgage Refinance HowStuffWorks
How to refinance a mortgage and when to do it WTKR News 3
When Should You Refinance Your Mortgage? | HowStuffWorks HowStuffWorks