Home equity loans and lines of credit are powerful tools that give homeowners simplified access to cash to use however they wish. Although alot alike, there are several key items that differentiate these home equity products. Make sure you clearly understand both products before tapping into your home’s equity for home improvement, purchase of a new car, etc..
Home market values are always on the move. The difference between a home’s market value and any outstanding mortgage balance equals the equity. For example, if your home is valued at $ 180,000, and you owe the mortgage lender $ 80,000, then your available home equity equals $ 100,000. With a home equity loan, the homebuyer may choose to access all, or part of the home’s equity.
What Makes a Home Equity Loan Unique?
Home equity loans are comparable to other forms of personal loans. While, personal loans are secured with a vehicle title or some other piece of property as collateral, with a home equity loan or line of credit, your house is the collateral.
Most home equity loans come with fixed rates and payments are usually amortized over 15 years. The homeowner receives the funds in a lump sum and after closing the funds can be used for any purpose. As with most loan products, the homeowner can decide to pay the loan quicker than the amortization period.
What is a Home Equity Line of Credit?
As with home equity loans, lines of credit are also based on the home’s available equity. However, instead of funds being supplied in a lump sum, credit lines are essentially revolving credit accounts. For example, if approved for a $ 150,000 credit line, a revolving credit account is established for this amount, and homeowners are free to withdraw funds up to this limit as necessary.
Lines of credit are similar to credit card cash advances. However, the rates are much more favorable. Once money is withdrawn, payoff must be completed with 10 years normally. Since line of credit rates are variable (using some factor of either the prime rate or LIBOR), payment amounts can and do change.
Buying a house and building home equity isn’t as easy as you may think. I have four tips that will be useful during the home buying process, after you’ve bought your home, and even when you decide to sell.
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