Fixed rate equity loans, also known as home equity loans, and adjustable rate lines of credit, also known as home equity lines of credit (HELOCs) are both home equity loans. Home equity loans are also known as second mortgages because they are secured by your home just like your first mortgage.
The loan term for second mortgages typically runs shorter than those of first mortgages. Second mortgages typically have a term of 5 to 15 years as opposed to 30 or 40 years like a first mortgage. According to Home Equity Loan Information (www.home-equity-loan-information.com), the interest rates on a home equity loan are higher than a mortgage. This is because a home equity lender takes on a greater risk than does a mortgage lender. While Home equity loans and HELOCs have some things in common, the way each works is quite different.
With fixed rate second mortgages, you get a lump sum of money on which you'll typically pay monthly principal and interest with fixed payments through the term of the loan. Once you get the money, you can't borrow further from the loan. You'd have to refinance the loan or get a new one after paying off the one you have. Home equity loans are usually fixed rate loans, but are also available as adjustable rate, interest only and balloon payment loans. Borrowers get home equity loans up to 125% ltv.
HELOC's work more like a credit card than conventional second mortgages. You can borrow up to the preset limit (the loan amount) as you need it. During the draw period, you have the option of making interest only payments on the loan, paying it down or paying it off and borrowing against it again and again. Home Equity Loan Information advises that you should be aware that some plans may require that you keep a minimum amount outstanding. Check to see whether or not it does and how much of a balance you need to maintain if it does.
When the draw period ends, you may have to pay the full outstanding balance, known as a "balloon payment". Or, you may have to make principal and interest payments on the outstanding balance over a fixed period of time similar to a home equity loans. But, HELOCs are almost always variable rate home equity loans, and you only pay interest on the amount of equity you use.
Home equity lines of credit usually have other costs associated with them that home equity loans don't, including a transaction fee each time you use money, annual fees to maintain the line and fees if your account is inactive over a certain period of time. You may also be subject to a minimum or maximum withdrawal amount each time money is used. Check with several home equity lenders online, and make sure that you choose a lender or broker who meets your needs.
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