Equity Loans

If you are a homeowner ,you can borrow against the value of  your house . You  have two option in this respect either through a HEL or  a HELOC . Both of these types of equity loans are second mortgage.These types of equity loans are basically junior loans and should not be confused with refinance .  

Advantages :

Both  of  these types  of  equity loans offer  lower  interest  rates , which  are  almost always  lower  than  those of credit cards  or conventional bank . Also , These  types of equity loans are  often  tax deductible . Home  Equity loans  are  recommended  to  consult  a  tax advisor  about  your   particular situation .  It  is  a  good   money  saving   option   for homeowners  who  want  to consolidate  debt . It also  turns some of  their bad credit into good credit .

HEL - It   stands  for  home   equity  loans . A   HEL  is  a  one  time  lump  sum  loan, generally  comes  with a fixed   interest   rate . With  a HEL, you  may  choose either   an   adjustable   rates   that  fluctates according  to  variations  in  the  prime  rate  or you may opt for a fixed rate . You have  to  pay  it  back in regular increments over a specified  period of time ,often 10-15  years  Before signing  a HEL,clear all doubts and important questions .What is the interest  rate, and  will it change over  the term  of the loan?What is the term of the loan?What will the monthly  payment be? Is there   a penalty if you pay off the loan before the end of  the term? What documentation do you  need  to  provide ? When will you receive the  funds ? A HEL is a good money saving option for a one time purpose such  as a  major renovation .

HELOC- It  stands  for  home equity  line  of  credit . A  HELOC  is  a  revolving  line  of  credit  with an adjustable  interest  rate .A revolving  line of credit means that you can borrow upto a certain amount.The interest rate  depends  only on the  portion of  credit  you  are currently  using  which  , in  turn ,keeps borrowing costs low.There is  generally a minimum payment due each month , with  the option to pay  off  as much   of the line as you want.Once you have paid off the money , you  can  borrow it again without  applying  for  any other equity loans . A HELOC is similar to  the way  you draw and  repay  funds   for other  revolving  lines  of  credit  such as  a credit  card . A HELOC  provides  a  good  option   to  meet  ongoing  cash  needs  such  as  medical   bills, college fees , consolidate  debts . Note  that , When  the  interest only period ends, you  have  to face  one of  the  two  scenarios . Firstly , your  monthly  payments  will increase  to  clear  loan principle . Secondly , you  may  be facing  balloon  payment  if  you are  not  in position  to  clear those  large payment . Balloon  payment  refers  to  paying  the  entire  outstanding balance of HELOC in full .

Differences between HEL and HELOC :

1  There are some closing costs when you get a HEL while  there  is no closing cost   in case of HELOC .
2  In  HEL , you  have  to  pay  fixed  interest  rates  per  month .Whereas , in case of HELOC  ,you have to pay as little as interest only each month .
3  Unlike a HEL , there is a risk of more interest rate in HELOC .
4  A HELOC usually carries a lower interest rate than a HEL . Also , Its rate fluctates according to the   prime rate .