Mortgage and Refinancing Information Channel:
We would like to thank the local libraries, schools, and universities for recommending students to visit us when doing research on any of our information topics.
Decision Time: Home Equity Loan or Home Equity Line of Credit?
Home equity loans and home equity lines of credit continue to grow in popularity. According to the Consumer Bankers Association, during 2003 combined home equity line and loan portfolios grew 29%, following a torrid 31% growth rate in 2002. With so many people deciding to cash in on their home's equity value, it seems sensible to review the factors that should be weighed in choosing between out a home equity loan (HEL) or a home equity line of credit (HELOC). In this article we outline three principal factors to weigh to make the decision as objective and rational as possible. But first, definitions:
A home equity loan (HEL) is very similar to a regular residential mortgage except that it typically has a shorter term and is in a second (or junior) position behind the first mortgage on the property - if there is a first mortgage. With a HEL, you receive a lump sum of money at closing and agree to repay it according to a fixed amortization schedule (usually 5, 10 or 15 years). Much like a regular mortgage, the typical HEL has a fixed interest rate that is set at closing for the life of the loan.
In contrast, a home equity line of credit (HELOC) in many ways is similar to a credit card. At closing you are assigned a specified credit limit that you can borrow up to - not a check. HELOC funds are borrowed "on demand" and you pay back only what you use plus interest. Depending on how much you use the HELOC, you will have a minimum monthly payment requirement (often "interest only"); beyond the minimum, it is up to you how much to pay and when to pay. One more important difference: the interest rate on a HELOC is adjustable meaning that it can - and almost certainly will - change over time.
So, once you've decided that tapping your home's equity is a smart move, how do you decide which route to go? If you take time to honestly assess your situation using the following three criteria, you will be able to make a sound and reasoned decision.
1. Certainty or Flexibility: Which do you value the most?! For many borrowers, this is the most important factor to consider. Your home is collateral for either type of home equity borrowing and, in a worst case scenario, it could be seized and sold to satisfy an outstanding unpaid loan balance. People do remember the double-digit interest rates of the early 1980's and, for many, the mere prospect of interest costs on a variable-rate home equity line of credit rising rapidly beyond their means is reason enough for them to opt for the certainty of a fixed rate HEL.
>From the borrower's perspective, "certainty" is the main virtue of a fixed-rate home equity loan. You borrow a specific amount of money for a specific period of time at a specific rate of interest. You repay the loan in precise monthly installments for a precise number of months. For many, knowing exactly what their future obligations will be is the only way they can borrow against the equity in their home and still sleep at night.
A home equity line of credit, in contrast, is short on certainty but long on the virtue of flexibility. With a HELOC you borrow funds on an irregular schedule that meets your needs at adjustable interest rates that can change quickly. Loan repayment is also flexible: you typically are required to make only relatively small "interest-only" monthly payments on a HELOC. However, you have flexibility to make any size payment above the interest-only minimum or payoff the loan at your will.
2. Do you need money for a one-time, lump-sum payment or will your cash needs be intermittent over several months or years? Home equity loans are best suited for one-time payment needs (a good example is consolidating debt by paying off several high-rate credit cards at one time). This is because at the time you close on a HEL, you will be provided with a lump-sum check in the amount you've borrowed (less closing costs). While it may be empowering to have that much money handed over to you, be humbled by the fact that you will immediately begin incurring interest costs on the entire balance.
When you close on a HELOC, on the other hand, you will be given a checkbook (or debit card) that you use only as needed. So, for instance, if you're embarking on a multiyear home improvement project for which you'll be writing checks at varying times, a HELOC might be best. Similarly, a credit line is probably best for paying sporadic college expenses. Interest on a HELOC is only charged from the time that your HELOC checks clear the bank and only on amounts actually disbursed?not the value of the entire credit line.
3. Do you possess sufficient financial self-discipline for a HELOC? Financially-disciplined borrowers can have the best of both worlds?almost. By taking out a HELOC but paying it back according to a self-imposed fixed amortization schedule they can enjoy both the flexibility of borrowing cash only as needed and the certainty of a fixed repayment schedule. HELOCs are typically more efficient in terms of lower closing costs and a lower initial interest rate. Also, a HELOC may be somewhat easier for borrowers to qualify for since the low, flexible monthly payments mean debt to income ratios that loan officers look at are more favorable for the borrower.
The one big factor not within the HELOC borrower's control is the interest rate (see #1 above). Interest rates will almost certainly change over the life of a HELOC. This means that a self-imposed "fixed" amortization schedule may need to be periodically refigured. Numerous internet sites provide free, powerful mortgage calculators that can assist you in preparing updated amortization schedules whenever needed. Some lenders are also meeting borrowers' demand for greater certainty by providing HELOC products that can be converted (for a fee) into a fixed rate loan when the borrower elects.
As mentioned earlier, HELOCs are much like credit cards and the similarity extends to spending temptation. If you are a person who has trouble keeping credit card debt under control and you haven't taken steps to change habits, then a HELOC probably isn't a smart choice.
You might be wondering which home equity product most people actually choose. According to the Consumer Bankers Association 2002 Home Equity Study, home equity lines of credit account for 28% of consumer credit accounts followed by personal loans (23%) and regular home equity loans (16%). In terms of dollar value, home equity credit accounts (HELs and HELOCs together) represent a full 75% of consumer credit portfolios with HELOCs having a 45% share of the market and HELs a 30% share. Of course, the popularity of HELOCs may subside if interest rates continue to rise.
Whichever home equity product you decide on be certain to shop for the best deal possible. The market is extremely competitive and there are many non-traditional options, including on-line lenders and credit unions, which should be considered in addition to your local bank.
About The Author
Tim Paul has more than 25 years executive financial management experience. His recent area of focus has been to develop and catalog proven strategies for financially savvy persons to get the most from their home equity credit lines. His website is www.sagetips.com.
MORE RESOURCES updated Tue. September / 29 / 2020
Mortgage and refinance rates today, September 25, 2020 | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
Mortgage and refinance rates today, September 25, 2020 | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
Refinancing Your Mortgage Is About to Get More Expensive The Wall Street Journal
How to refinance your mortgage without closing costs Fox Business
A record number of borrowers can now save on a mortgage refinance, as rates set another historic low - CNBC
A record number of borrowers can now save on a mortgage refinance, as rates set another historic low CNBC
How to refinance your mortgage fox5dc.com
Sovereign Lending Group, Mortgage Refinance Company, Hires Curt Rosequist As They Expand To Texas. - globenewswire.com
Sovereign Lending Group, Mortgage Refinance Company, Hires Curt Rosequist As They Expand To Texas. globenewswire.com
Mortgage and refinance rates today, September 15, 2020 | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
Mortgage and refinance rates today, September 15, 2020 | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
Mortgage and refinance rates today, September 16, 2020 | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
Mortgage and refinance rates today, September 16, 2020 | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
Mortgage Refinance Calculator Clark.com
Should I refinance my mortgage? A financial planner explains Business Insider
Refinance soon to avoid the FHFA adverse market refinance fee | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
Refinance soon to avoid the FHFA adverse market refinance fee | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
How and Why to Refinance Your Mortgage: A Step-By-Step Guide Clark.com - Clark Howard
The refinancing boom is just getting started HousingWire
If You Want to Refinance Your Mortgage This Year, You Need to Do It Now—Here's Why - KCTV Kansas City
Smart Money Podcast: The Psychology of Debt, and When to Refinance Morton Times-News
When Should I Refinance With a No Closing Cost Mortgage? Clark.com - Clark Howard
Historic mortgage rates spark a resurgence of Dayton homebuyers —and a refinancing boom - Dayton Business Journal
Historic mortgage rates spark a resurgence of Dayton homebuyers —and a refinancing boom Dayton Business Journal
15-year mortgage rate hits new record low Bankrate.com
Best ways to pay a large credit card bill Bankrate.com
New Fed policy could mean years of low mortgage rates | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
New Fed policy could mean years of low mortgage rates | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports
Harambee first sacco to access mortgage refinancing The Star, Kenya
Home buyers: It could pay to wait out for the housing market to open up some more in 2021 - USA TODAY
My Spouse Has Bad Credit. Will We Get a Mortgage? The Motley Fool
Personalized refi analysis outperforms unsolicited pitches: Survey National Mortgage News
Refinancing, delinquencies soar in divided mortgage era LA Daily News
Mortgage refinance: Everything you need to know Fox Business
Seven Out of 10 Homeowners Who Research Refinancing Get Unwanted Sales Pitches: Survey - Credible News
Seven Out of 10 Homeowners Who Research Refinancing Get Unwanted Sales Pitches: Survey Credible News
The Best Way to Pay for Home Renovations This Fall The Motley Fool
United Shore seeks to outpace Rocket in mortgage war The Detroit News
How to get the best mortgage refinance rates Fox Business
When should you refinance your mortgage? Fox Business
10 things to know before refinancing your mortgage Fox Business
3 Reasons Carnival, Royal Caribbean, and Norwegian Cruise Line Need to Start Sailing in November - Nasdaq
3 Reasons Carnival, Royal Caribbean, and Norwegian Cruise Line Need to Start Sailing in November Nasdaq
Compare Today's Mortgage Refinance Rates: Sep 28 Credible News
Mortgage refinancing is about to get more expensive Pittsburgh Post-Gazette
Mortgage refinancing will be 0.5% more expensive, Fannie Mae and Freddie Mac to raise fees - USA TODAY
Mortgage refinancing will be 0.5% more expensive, Fannie Mae and Freddie Mac to raise fees USA TODAY
How to get a low-cost mortgage refinance Bankrate.com
How does mortgage refinancing work? Bankrate.com
Refinancing Your Mortgage? Those Rock-Bottom Interest Rates Aren’t for You - The Wall Street Journal
Refinancing Your Mortgage? Those Rock-Bottom Interest Rates Aren’t for You The Wall Street Journal
Mortgage refinance applications spike 79% as homeowners rush to take advantage of lower rates - CNBC
Asia Capital Real Estate Provides $49.1M Refinancing to Millennium at Hometown in North Richland Hills, TX - GlobeNewswire
Asia Capital Real Estate Provides $49.1M Refinancing to Millennium at Hometown in North Richland Hills, TX GlobeNewswire
Rushing to Refinance Your Mortgage: 6 Tips and What to Avoid The New York Times
Refinancing just got more expensive, thanks to this new fee | Mortgage Rates, Mortgage News and Strategy - The Mortgage Reports
Refinancing just got more expensive, thanks to this new fee | Mortgage Rates, Mortgage News and Strategy The Mortgage Reports