Homeowners who want to remodel or improve their home have options for financing the projects. First, the home equity loan allows owners to borrow from the equity they have built up in their home. Next, there are home equity lines of credit that provide the homeowner with a line of credit with a maximum balance. When choosing the right loan product, the prospective borrowers review the benefits and drawbacks of each product.
The Benefits a Home Equity Loan
The product has a lower than average interest rate and the loans are secured by the value of your home. When comparing the loans to unsecured accounts, such as credit or retail store cards the interest rates are significantly lower this way. The interest rates remain consistent and won’t change throughout the term of the loan. You won’t have to worry about sudden or unexpected increases in your payments due to the interest rate.
The total loan value is available immediately. You won’t have to wait to get more of the full amount over an extended period of time. The lender gives it to you today. You don’t face any restrictions beyond the full loan value offered to you. You don’t have to use all the money right now. Some lenders even provide direct deposit for the loan value.
The Benefits of a HELOC
The loan product works in the same manner as a credit or store card, but you aren’t issued a card. You’ll access the funds throughout the designated draw or access period. The lender informs you of the maximum value for your line amount. You don’t have to worry about making the monthly payments until you actually access the money. The payments and interest are calculated according to how much of the funds you use.
The interest rates are less at the beginning of the contract. Additionally, you won’t incur many closing costs or application fees as you would in a traditional mortgage that could add up to thousands of dollars. However, some contracts could include hidden fees, such as appraisal services or title search fees.
The Drawbacks of a Home Equity Loan
The interest rates for the loans are greater than the credit line. The lender provides you with a fixed rate. This means that it never changes. Your home is the collateral used for the loan. If you miss too many payments, then you are subject to foreclosure. The total cost of obtaining the loan is greater since they require closing costs. Some lenders even allow you to transfer the closing costs to the loan so you don’t pay anything when you receive the loan initially.
The Drawbacks of a HELOC
Your payment amounts are not consistent since you have a variable or changing interest rate. The lender has the right to foreclose if you become delinquent and/or do not pay off the credit line. If your payments are not on time, then the lender cuts off your access to the funds. Read your contract thoroughly before accepting or agreeing to the terms of either loan product.