There are two very basic ways to pull cash out of your home: 1. home equity loan, and 2. home equity lines of credit or HELOC. It is important to understand the main differences, advantages and disadvantages of each one so you can pick the loan that is right for you.

First, let's look at the similarities of those two types of home loans. For most homeowners, the interest paid on home equity loan and HELOC is tax-deductible, just like with a first mortgage loan. Also, the interest rate charged for these loans typically is lower than other forms of financing, such as credit cards and personal loans you can get from banks and credit card issuing banks. Also neither loan type dictates how you spend your money. Keep in mind that interest on credit cards or personal loans are NOT TAX-DEDUCTIBLE.

There are major differences between the two types of loans that you must understand. A home equity loan is another name for a second mortgage. You get your amount of money requested, and it comes with a fixed repayment program that spells out the interest rate on that loan, the size of the monthly payments, and how long you will have to make them. As with a fixed rate mortgage, the interest rate and the monthly payment will not change during the life of the loan.

A HELOC is more flexible but also can be more volatile, since the interest rate can change many times over the life of the loan. You take out money as you need it, and you pay it back as you can. You pay only the interest on the amount that you borrowed at any one time, and you can take money out and pay it back as often as you have to. It is basically an ongoing line of credit you receive from your lender based on your home equity.

If you need a large sum of money all at once, then a home equity loan is what you probably want, especially if you want to have a fixed interest rate and terms.

A HELOC is for homeowners who might not have a particular need for a loan at the present time but who wish to have an open credit line guaranteed by the equity of their home. They are less concerned, about the rates or payments, and can live with the fact that the interest rate can fluctuate with that type of loan.

Most HELOCs will convert to a fixed-rate loan, usually after 10 years. The interest rate will lock in at whatever the rate is when it converts, and your payments will be fixed. If you do not owe anything on the loan at the time, then it is considered paid off. If you still want to get access to your home equity through a HELOC, you would have to go out and open another one through your lender.

Also a HELOC, usually comes with an annual charge of around $50 to $100, which gives you access to your equity funds anytime you need it.

HELOCs also have another characteristic: most of them are interest-only loans. That means all you have to pay is the monthly interest, which can be a benefit or sometimes a disadvantage. Certainly, the interest you pay on a HELOC will be a much lower than it would be if you owed that money to a credit card company. The great advantage is that the interest is tax deductible. The disadvantage is that if you only pay is the interest on your loan, you will never reduce the size of the loan. You will just keep paying monthly interest payments and eventually, when the loan converts to a fixed-rate loan, you will still face the same sort of monthly payments that you would have had on a home equity loan.

Since a home equity loan, like a HELOC, is usually a second mortgage, the rate you pay will probably be higher than the rate you get on a first mortgage. This, however, is not always the case.

It is extremely easy to get either a home equity loan or HELOC. You can get a provisional answer from your lender in a couple of days, subject to a property assessment, and have the loan funded in 30 days. I advise you to always shop around and look at more than just the interest rate. Look at the loan origination fees, points, as well as all the other charges. If you are looking for a HELOC, check out the annual charge from different lenders.

The equity in your home is yours to use when you need it. Use it wisely. When you decide to take out some of the equity in your home, make sure you find the type of home equity loan or HELOC that best fits your needs.

Andre Plessis

Andre Plessis
"The Mortgage Guru"
"A Mortgage Professional whose primary goal is to provide the expertise, guidance and skills necessary to obtain the best mortgage to meet your personal needs".
View Client Testimonials

P.S. If you are at all intimidated or unsure about the mortgage process if you don’t understand how to evaluate your options in getting a mortgage loan our 15 key questions will help you feel comfortable that you are making the best decisions. Also if you are in the process of refinancing your home with anyone, CALL ME and I will let you know if you are being offered the best loan option based on market conditions and your financial situation.

Copyright 2005© Apply-Free.com