When speaking of home equity products, there are basically two types: the home equity loanhttp://mortgages.nationalrelocation.com/home-equity-loans/ and home equity line of credit. Each offers a lower interest rate, which other loan or credit options, and in most cases the interest that you do pay is tax deductible.
Home Equity Loan
The home equity loan is often referred to as a second mortgage. When this is taken out, the payments are given at a fixed rate over a specified period of time, usually ten to fifteen years. This type of loan is best taken out when you have a certain goal in mind such as making a home improvement or purchasing a vehicle.
Home Equity Line of Credit
This is a line of credit in which you take out against the value of your home. It is basically used like any other line of credit and when you do not need the entire sum of what your house is valued at upfront. The rate at which you will get on this line of credit is based upon your ability to pay and your credit worthiness.
Each home equity product has its own advantages and disadvantages, and each is best tailored to a specific situation.
Advantages and Disadvantages of Home Equity Loans
The advantages of a home equity loan is that is at a fixed interest rate that may be tax deductible. In addition, it allows for set monthly payments and all the money is available in one lump sum. The disadvantages of the home equity loan is that you cannot just pick and choose the amount that you want to borrow, you must borrow the entire amount upfront. In addition, there are numerous fees that are attached to the loan that you must pay, and payment begins as soon as you receive the lump sum. Plus, if you do fail to make a payment, you may be forced to sell your home.
Advantages and Disadvantages of Home Equity Line of Credit
The advantages of a home equity line of credit is that you only use what you need, then pay back that amount at the interest rate that is average for the time, the interest rate is lower than credit cards, and in many cases the interest that you pay is tax deductible. Plus, you have the money constantly available to you as long as you pay it off when needed. The disadvantages are that many people find the availability of money at any time tempting and get themselves into trouble, in addition since the interest rate is variable that means it could be quite high. Plus, if you do miss a payment, you may be forced to sell your home.