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New Choices For Home Equity Loans
Staff - Mortgage Lenders Plus.com
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If you get into home equity loan comparison, you will learn fairly quickly that home equity financing comes in two models. One choice is a normal loan based on your home equity that is paid off at a fixed rate. This is the “second mortgage,” as it used to be known, a term that has seemingly become passé. The other option is an equity line of credit, which is a variable rate home equity loan designed to allow you to borrow any amount up to your equity credit limit. You have the option, as with a credit card, to pay as little as the outstanding interest every month – at least for a while. Banks have begun introducing variations on these two basic schemes, in their never-ending quest to develop more financial choices for home buyers and home owners. One example is a loan called a “home equity account,” which has some of the features that you find in both the loan and the line of credit. Hybrids like this make home equity loan comparison a little more complicated. The home equity account starts out as a standard home equity loan with a fixed interest rate for three, five or seven years – your choice. Each month you have the option of paying interest only or paying down some of the principal as well. It then becomes, in effect, a variable rate home equity loan by turning into a standard home equity line of credit (HELOC) where the interest rate adjusts in accordance with the prime rate. The initial interest rate on one of these hybrids is going to be lower than with a fixed rate home equity loan, just as the interest rate on an ARM is lower than on a fixed rate note. It’s difficult to go through a home equity loan comparison with one of these hybrids, however, because the interest rate over the life of the loan is unpredictable. Unpredictable, that is, unless you choose to refinance out of it when it becomes a variable home equity loan, or line of credit. This is the quandary that is confronting current ARM holders and will be an issue for many millions of additional homeowners over the next few years. Shall I spend the money on a new loan, or live with the uncertainty of a variable rate? Another option on the market is a home equity line of credit that allows you to borrow a fixed sum and pay a fixed rate on it over a fixed period. If your line of credit stands at forty thousand dollars and you want to borrow twenty thousand for five years, you can do so just as with a five year fixed rate loan. This varies in a home equity loan comparison with the hybrid described above, where you pay interest on the entire loan/line of credit no matter how much of it you are using.
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