The Truth About Equity Loans And HELOCs

Jan. 9, 2012 - PRLog -- Home equity lines of credit are different from equity loans mainly in that borrowers do not get the full amount up front. The money you get with a credit line should not be over the credit limit, meaning that lines of credit are similar to credit cards. You can withdraw money from the line of credit until the draw period ends, which is from 5 to 25 years. The amount drawn is to be repaid, plus interest. At the end of the draw period, you should repay the full principal, which can be done in a lump sum or according to an amortization schedule.

HELOCs have some definite advantages over equity loans and other financial products. One advantage is that the borrower can repay the credit line at a time of his convenience. If you are making payments toward a mortgage loan, and it is a closed mortgage, a prepayment penalty applies for paying it off early. Second, lines of credit are offered with a variable interest rate which is lower than the rate on other products. This means that borrowers are given access to inexpensive money.

Similar to home equity loans, you can use the amount borrowed for anything you see fit. However, home equity lines have an added advantage because on paying down the limit, you can access more funds.

On the other hand, some argue that home equity loans are among the most desirable and flexible lump sum loans, mainly because they are offered with a low interest rate. They are also beneficial for persons who need considerable amounts of money for medical bills, large-scale projects, and short-term ones.

Then, HELOCs are beneficial for persons who need a considerable sum of money over a certain period of time, for example, for a home remodeling project or college education which require long-term payment plans. HELOCs also have certain advantages over credit cards, the main being lower interest rates. Home equity credit lines are also offered with an interest rate that is lower than the prime rate. Unlike this arrangement, credit cards come with an interest rate of around 18 percent.

As an added benefit, interest applies only to the amount drawn. If money is sitting idle, no interest applies to them, which is not the case with other types of loans. With them, interest is charged on the whole amount, even if the borrower does not use the money. Finally, home equity lines of credit do not have closing costs. This obviously makes them a good option as it saves a lot of money.

It should be noted that some HELOCs charge an annual or monthly fee, or both. Then, there is one major downside to both home equity loans and HELOCs, and it is that your home serves as collateral. You can lose your home in case of default. Making timely payments is important, regardless of the terms and conditions you have been offered.

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