Sunday, 22 March 2009

How To Pick The Right Home Equity Loan Product For You

Home equity loans have a variety of options to help fit your budget needs. So you can find closed, fixed rate home equity loans or a flexible line of credit with adjustable rates. Rates and fees vary according to the loan product you select. So make sure that you pick the right credit for your situation.

1. Know The Cost Of Credit

Before you select a home equity loan, understand the costs involved. You can easily find information on lender sites. They will post general rates, along with information on fees and payment schedule.

In general, closed home equity loans, also called second mortgages, have fixed rates with their set payment schedule. Closing costs are moderate, but you have protection for rising rates.

A line of credit has higher rates, but few, if any application fees. For the first five years or so, you just make interest payments on the amount you have used.

The other option is to refinance your first mortgage while cashing out your equity. If you were already planning to refinance, this can qualify you for a lower rate and save you money on closing costs.

2. Identify Your Purchase Goals

The type of purchases you plan to make with your home equity loan will also help you determine which is the best home equity loan for you. For large fixed purchases, like a remodel, a closed home equity loan works best. Lines of credit works better for small purchase over time or as a source for emergency cash.

3. Plan For Repayment

Home equity loans also have different payment plans. Closed loans require you to pay both interest and principal payments. Lines of credit only expect interest payments, at least for the first few years. After that your loan can be refinanced into a closed loan or be required to make additional principal payments.

The length of your loan should also be taken into consideration. With the closing costs of closed loans and cash out refi, you will need to keep the loan for several years to recoup the costs, even with their lower rates. But if you are planning to move soon, a home equity line of credit could be a cheaper source of credit.

See our resources for more information on a Second Mortgage and Home Equity Loan or for a House Mortgage Refinance

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