5 Tips to Better Understand a Home Equity Loan or Line of Credit
By Sandy Spring Bank
If you own your home, a home equity loan or line of credit is a smart way to use the equity in your home to fund large expenses, such as home renovation projects, college tuition or a new car. Here are five tips to help you better understand home equity and get the most out of your home equity loan or line of credit.
- Understand the difference between an equity loan and an equity line.
An equity loan is a term or closed-end loan, meaning you get all your money up front and make fixed payments over a set amount of time, with a fixed interest rate. Once you get the money, you cannot borrow further from the loan.
An equity line (HELOC) is an open-ended line of credit. You may borrow up to a certain amount for the term of the loan. During the term you can make advances for the amount you need at the time. As you pay down the principal you can use the line again, up to the end of the draw period. This gives you more flexibility than a fixed-rate home equity loan.
- Know the uses for a loan and a line. Use an equity loan when you need all the money up front, like for home improvements or debt consolidation. An equity line, however, is used when you have a periodic need for money, or need the money for a future event, like a child’s college tuition down the road.
- Get a reasonable credit line. If you get too large of a credit line, you might be turned down when applying for other loans because some lenders calculate your payments based on your available credit instead of used credit.
- Know if your loan has a penalty if you pay off or close the line early. If you are planning to sell or refinance your home in the next three to five years, you will want to avoid the “No Closing Cost” home equity loan, as there may be a pre-payment penalty.
- Check the equity line interest rate cap. Many credit lines have an interest rate cap, which can vary by state. It is important to understand the maximum rate and be prepared to make payments at the highest possible rate.
While home equity can be tricky, it is crucial to understand the meaning and difference between an equity loan and an equity line of credit. With the help of these tips, not only will you be able to understand, you will also be able to continue on your journey of homeownership with confidence. We are also available to assist you on this journey.