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 / 29 / 2024
HOME-MORTGAGE LENDING NEAR TWO-DECADE LOW AS SLUMP CONTINUES ACROSS U.S. DURING FOURTH ... - Morningstar
HOME-MORTGAGE LENDING NEAR TWO-DECADE LOW AS SLUMP CONTINUES ACROSS U.S. DURING FOURTH ... Morningstar
Mortgage Interest Rates Today, February 29, 2024 | Rates Hold Steady After Spiking Earlier This Month - Business Insider
Mortgage Interest Rates Today, February 29, 2024 | Rates Hold Steady After Spiking Earlier This Month Business Insider
Mortgage Rates Edge Down Investopedia
Mortgage interest rates for today February 29, 2024: Where are rates wrapping up for February? - AOL
Best Mortgage Refinance Lenders of February 2024 | U.S. News U.S News & World Report Money
How Soon Can You Refinance a Mortgage? NerdWallet
Will Mortgage Rates Go Down in 2024? What Homebuyers Should Expect Business Insider
Mortgage Interest Rates Today, February 28, 2024 | Rates Steady Ahead of Latest Inflation Report - Business Insider
Mortgage Interest Rates Today, February 28, 2024 | Rates Steady Ahead of Latest Inflation Report Business Insider
Mortgage Interest Rates Today, February 27, 2024 | Rates Ease, but They're Still Up From Last Month - Business Insider
Mortgage Interest Rates Today, February 27, 2024 | Rates Ease, but They're Still Up From Last Month Business Insider
Mortgage Refinance Rates: Compare Current Rates Business Insider
Mortgage Interest Rates Today, February 25, 2024 | Rates Increased Last Week — Here's When They Might Go Down - Business Insider
Mortgage Interest Rates Today, February 25, 2024 | Rates Increased Last Week — Here's When They Might Go Down Business Insider
Mortgage Interest Rates Today, February 24, 2024 | Rates Continue Inching Up Near 7% - Business Insider
Mortgage Interest Rates Today, February 24, 2024 | Rates Continue Inching Up Near 7% Business Insider
Mortgage Interest Rates Today, February 26, 2024 | Rates May Drop More Slowly Than Expected This Year - Business Insider
Mortgage Interest Rates Today, February 26, 2024 | Rates May Drop More Slowly Than Expected This Year Business Insider
Can You Refinance With No Income Verification in 2024? The Mortgage Reports
Current mortgage refinance rates CNN Underscored
California, United States Luxury Real Estate Home California Listings
How to Refinance Your Mortgage NerdWallet
Average Mortgage Interest Rates: Mortgage Rates by Credit Score, Year, and Loan Type - Business Insider
Average Mortgage Interest Rates: Mortgage Rates by Credit Score, Year, and Loan Type Business Insider
Best Mortgage Refinance Lenders In 2024 Bankrate.com
Scam ads misrepresent FHA cash-out refinance plan VERIFYThis.com
VA Refinance Rates - Current VA Loan Refinance Rates Today Business Insider
Refinance Requirements: What You Need to Refinance Your Home in 2024 The Mortgage Reports
Behind On Mortgage Payments: 6 Ways To Catch Up Bankrate.com
Cash-Out Refinancing: How It Works, When To Do It Bankrate.com
When to Refinance Your Mortgage: 5 Times to Consider Refinancing Business Insider
Mortgage Rates This Week NerdWallet
Best Student Loan Refinance Companies In February 2024 The College Investor
30-year refinance rates: What to know CNN Underscored
CFPB Releases Study of Refinance Mortgage Loans Between 2013 and 2023 Consumer Finance Monitor
How To Refinance An Underwater Mortgage Bankrate.com
What Credit Score Do I Need To Refinance? Bankrate.com
The Great Pandemic Mortgage Refinance Boom - Liberty Street Economics Liberty Street Economics -
The best mortgage lenders for refinancing in February 2024 CNN Underscored
Should I Refinance My Mortgage Now? When to Refinance As Rates Drop Business Insider
How Soon Can You Refinance a Mortgage Loan? 2024 Rules The Mortgage Reports
Conventional Refinance Rates and Guidelines for 2024 The Mortgage Reports
When to Refinance Mortgage: Is it Time? - Buy Side from WSJ The Wall Street Journal
The Sales Pitch for an 8% Mortgage: Buy Now, Refinance Later—for Free The Wall Street Journal
How To Get The Best Refinance Rate Bankrate.com
Homeowners, get ready to date the rate. Refinancing is making its comeback as mortgage rates drop to 7% - Fortune
Homeowners, get ready to date the rate. Refinancing is making its comeback as mortgage rates drop to 7% Fortune
10-year refinance rates: What to know CNN Underscored
Should You Refinance Halfway Through Your Mortgage? Bankrate.com