How to Compare Home Equity Loans
Home equity loans work in very much the same way as purchase (first) mortgages and can be evaluated in similar ways. However, there are few differences to be aware of when comparing home equity offers.
Loan or line of credit?
The first thing to know is whether you are looking at a loan or a line of credit. There are some important differences. A home equity loan is a lump sum loan, usually with a fixed interest rate and monthly payment.
A line of credit, by contrast, works a bit like a credit card secured by your home. You use the line of credit when you need it and are only responsible for payments on what you use. A line of credit typically has a variable interest rate, so your payments can change over time.
How long is the term?
Unlike mortgages, home equity loans and lines of credit generally have shorter terms, anywhere from five to 15 years. In general, the longer the term, the lower the monthly payment; but that also means you carry the debt for longer.
Interest Rate.
The interest rate on a home equity loan or line of credit is usually higher than for the original mortgage, so differences in the interest rate can add significantly to the monthly payment.
Since interest rates for home equity lines of credit are usually variable, be sure to ask the lender what the interest rate is based on and how often changes occur.
Fees and penalties.
Compare any application fees or closing costs, and any annual fees. Ask if there are any fees charged if you want to pay off your home equity loan early (called a pre-payment penalty).
Special comparisons for lines of credit.
Because lines of credit are more flexible, they often also come with more features. For instance, some lines of credit come with a “fixed-rate” option, which allows you to use part of the line of credit at a fixed-interest rate for a period of time, ensuring a stable monthly payment.
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