A home equity loan is a type of loan that you take out against the market value of your home.
There are two types of home equity loans judging by the rate:
1) a fixed rate equity loan; the money being advanced to you when you close your equity loan.
2) a variable rate equity line of credit, also known as HELOC.
The similitude in these types of loans is that the term is fixed, most financial institutions stating periods of 10 and 20 years.
* When should I take out a fixed rate home equity loan?
A fixed rate home equity loan is mainly like an auto loan, meaning that you get the full amount of money at the start of the loan and pay it off in equal payments for the term you selected.
A fixed rate home equity loan will prove to be opportune in one of the cases below:
-If you want to consolidate debt, especially higher rate debt
-It would also prove useful as a down payment on a real estate investment
-To use a second mortgage along with the first one on a home purchase or home refinance
* Why should I choose a fixed rate home equity loan?
Maybe the most important reason for taking this option is the fact that the interest on debt you pay off is in general tax deductible in some limits. Practice shows that the interest rate in credit card rates is usually higher than the one in home equity loan or line of credit.
Taking out a fixed rate gives you the benefit of a lower payment each month, which means you are only paying the interest. It is best to check both the fixed rate and the lines of credit in order to determine which situation fits you the best.
Flexibility is another pro; this type of loan is giving you the advantage of choosing when to use your money. It is essential to fully understand the terms and conditions for both a fixed home equity loan and a line of credit when shopping for one, paying even more attention on the maximum interest rate you can pay and watch also for the prepayment penalties. These types of loans usually often prove vicious because of the fees for either paying off the loan early or closing it.
When considering the use of both your home and your equity as a debt solution, all options should be carefully considered: as a second mortgage, mortgage refinancing or a home equity line of credit.
With this said it is more than recommended to carefully read the fine print provided. Most financial institutions lower the fixed rates according to your personal credit history.
A maximum of 80% of your home's value minus your first mortgage can be financed. The maximum of 80% can differ though according the law.
* What should you be aware of and which are the risks I have to consider when applying for a fixed rate home equity loan?
Greatest disadvantage in being financed for this type of loan is that foreclosure can be triggered if you are late or miss the loan payments within sixty to ninety days, this leading to being haunted by the unpleasant thought of having to sell or lose you home.
Also, selling your home makes the entire amount of your fixed rate home equity loan become due.
Watch for the variable interest rate, it changes according to the evolution of economy leading to your monthly payments to rise or fall. You have to be aware of the cap on the loan's interest rate. It sets how high the interest rate can increase over a one year period or over the whole loan time period.
Even though the interest rate of a home equity loan might be fixed at a lower rate than that of a HELOC, the risk is greater because you're taking out all of your home's equity in one stage.
Ask about all fees that can appear. Often application, origination and withdrawal fees can be charged.
How to succeed with the fixed rate home equity loan?
Be rational, compare more financial institutions. Search for home equity comparison charts. Interest rates, loan amount, repayment conditions, fees and other additional costs can vary.
Fully understand the loan conditions before signing the contract. Consider these aspects: How often are the interest rates adjusted and which index reveals the calculation of this rate? Is interest rate cap reasonable?
Smartly set up your repayment schedule and, if you have the option of making small payments over a long period of time, remember it is often a wiser choice to pay more than the minimum required. Correlate you acquisition type with the period of your loan. Avoid repaying your loan in, for example, more than seven years for a home improvement.
