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Home Equity Loans
Types of Home Equity Loans Fundamentally, there are two types of home equity
loans.
1.Home Equity Line: When you get a home equity line, you obtain the right to
draw money, whenever you want, over a certain period of time. You only pay
interest on the amount you borrow. You may borrow, pay off and borrow again
against the line of credit. You typically access the line with a check or credit
card. 2. Second Mortgage (home equity loan): When you get a second mortgage, you
obtain a lump sum of money. The interest rate and monthly payments are fixed.
Before deciding which type of loan you want, consider how you'll use the money.
If you need funds for a single expense, such as a room addition, remodeling,
etc., you'll want to strongly consider a fixed-rate, second mortgage. You
receive one lump sum at the beginning of the loan term. You pay it back in
equal, monthly installments. The certainty of a fixed interest rate and equal
monthly payments make the fixed-rate, second loan very attractive. Will this
type of loan be less expensive compared to an adjustable rate, home equity line?
There is no way to know with certainty. One would have to be able to predict
interest rates with accuracy. Consider one of the reasons why adjustable rate
loans were invented: to shift interest rate risk from the lender to the
borrower. When market interest rates rise above the interest rate on your
fixed-rate mortgage, the lender is effectively losing money on your mortgage and
you're getting a bargain. Lenders wanted a way to protect themselves from this
situation--thus the adjustable-rate mortgage. If you need periodic amounts of
money over time, for a child's education tuition, for example, a home equity
line may be ideal. You can borrow only the amount you need, when you need it.
These loans carry adjustable (ARM) rates, but some banks allow you to convert a
portion of your loan to a fixed-rate second. You may pay a premium for the
convenience of an equity line, including a transaction fee for each draw and an
annual fee if you draw or not. Deciding in advance which type of loan is best
for you helps when comparing the expense of various loans. Since the APR for a
fixed-rate second is calculated differently compared to a home equity line, APR
comparisons can be difficult when comparing a fixed-rate second to a home equity
line. APRs of fixed-rate seconds account for points and other closing charges.
APRs for home equity lines don't account for points and other closing costs.
When comparing the same types of loans (apples to apples), APRs are much more
meaningful. Interest may be fully deductible. Consult your tax advisor
regarding your particular situation. ** Under certain circumstances, some loan
programs let you convert part of your home equity line to a fixed-rate, home
equity loan.
_____________________________________________________________________ M&M
Resources Unlimited, Inc.
www.mmresourcesunlimited.com 1577 Ridge Road West, Suite 119 Rochester, NY 14615
Office: (585) 865-0950 Fax: (585) 865-3202 Toll Free: 1-800-937-2350 Licensed
Mortgage Banker/NYS Banking Department
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