Racked up holiday bills? Consolidate your debt smartdecision-januaryslideswith a home equity loan!
There are typically two types of Home Equity Loans:
Closed-End Home Equity Loan(HEL)
A home equity loan is, at heart, a second mortgage. You receive a lump sum at a fixed rate of interest that’s locked in when you procure the loan. You’re expected to pay it back in fixed monthly payments for a fixed amount of time — typically 10 to 15 years.
· Your interest rate is fixed.
· Because payments are due monthly, this can be a good option if you have a hard time exercising the discipline needed to pay off a loan a little at a time on your own.
· The interest rate on a HEL, though higher than that on your primary mortgage, will still be lower than the rates available on credit cards.
· If you’re using your HEL to pay off credit cards, in addition to lower interest rates, you’ll have the benefit of consolidating all your debts into one payment.
· The interest on your home equity loan may be tax-deductible. Please consult your tax advisor for guidance.
Home Equity Line of Credit (HELOC)
A home equity line of credit, by contrast, functions more like a credit card — using your home as collateral.You ask for a line of credit, and the lender assigns a maximum amount you can borrow — a credit limit. Lenders typically determine this amount by taking a percentage of your home’s appraised value and subtracting the amount you still owe on the mortgage; then they factor in things such as your credit history, debt load, and income. The bank then gives you a debit card that you can use to withdraw funds.
Unlike a HEL, the line of credit allows you to borrow what you need, when you need it, up to the full amount approved.
· You don’t have to borrow in a lump sum; you can withdraw the funds when you need them.
· HELOCs can be used as emergency funds in the event of a crisis, like losing your job, since you can access funds on an ongoing basis as needed.
· The rates of interest, though variable, may still be lower than other forms of consumer credit, since they are secured with collateral — your home.
· The interest on your HELOC may be tax-deductible. Please consult your tax advisor for guidance.