The Four Questions You Must Ask Yourself When Considering Which Type of Home Equity Loan Is Best

Home equity loans come in two very different varieties – typically a lump sum home equity loan that will have a fixed interest rate and must be repaid on a monthly basis within an exact set amount of time. The other type is a line of credit, which allows a homeowner to borrow money in very much the same way as a credit card and can be borrowed from, repaid and then borrowed from again, before being repaid in its entirety whenever the original mortgage is due. However, it can often be difficult to decide which type of additional loan is best for you, so you should ask yourself the following four questions before reaching your decision.

When Do You Require the Money?

If the money is for immediate use and you have no other reason to borrow money then you may be better off with a standard home equity loan. Let’s say, you have to pay $10,000 towards your daughter’s wedding and a further $5,000 to refurbish your kitchen then you have set tasks in mind, and both will usually need to be paid for in a lump sum.

How Long Do You Need the Money?

Now let’s imagine that you are paying for your child’s university education and you are required to pay fees and charges on an annual basis. Well in this scenario you may be better off with a line of credit. This will allow you to only pay interest on the amount of you have used, whereas the rest of the loan is still available to you as and when you need it. You see, with a standard home equity loan if you borrowed $15,000 you would be charged interest on the $15,000 from day one until it is repaid. However, if the universities fees are $3,000 per year, you would only be paying interest of the amount of money that you have withdrawn from the loan, i.e. interest on $3,000 in year 1, interest on $6,000 in year 2, and so on.

How Long Will It Take You to Pay Off?

Let’s face the facts, no-one actually wants to borrow money, they simply want the things that the money will get for them. Therefore, the sooner you can repay a debt, the better. If you can afford to make regular payments on a monthly basis, then a standard home equity loan may be the better choice, although if you are expecting a large cash lump sum in a few years you may be better off allowing interest to accrue on a line of credit before finally paying it off in one go when money is available to you.

Will You Be Too Tempted By a Line of Credit?

Both types of additional borrowing are often referred to as a second mortgage because both loans will still be secured against your property. However, the way in which they work is very different. A line of credit works in very much the same way as a credit card and therefore has the exact same temptations. A line of credit will usually need to be repaid in full at the same time as your mortgage account ends, but if it is lying there dormant for a number of years will you be tempted to dip in for no real reason? If so, you may be better off avoiding a line of credit and sticking to the more standard borrowing and payment etiquette that comes with a home equity loan.

Nancy Baker, today’s guest author, is a freelance blogger who is currently working for Benson Mortgages. She enjoys travelling and visiting historical places.

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