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Fixed-rate loan vs. line of credit

There are two types of home equity loans:

• term, or closed-end loans, and
• lines of credit.

Both are sometimes referred to as second mortgages, because they're secured by a personal residence, just like an original (first) mortgage.

Home equity loans and lines of credit are usually for a shorter term than first mortgages. The most common types of first mortgages are amortized for 15 to 30 years, while equity loans typically have a life of five to 15 years.

A home equity loan, sometimes called a term loan, is a one-time lump sum that is paid off over a set amount of time. It has a fixed interest rate and the same payments each month, just as a first mortgage. Once you get the money, you cannot borrow further from the loan.

A home equity line of credit (HELOC) works more like a credit card. You are allowed to borrow up to a certain amount for the life of the loan. The term at TrustBank is 15 years. During that time you can withdraw money as you need it. As you pay off the principal, your credit revolves and you can use it again. Let's say you have a $10,000 line of credit. You borrow $5,000, but then pay back $3,000 toward the principal. You now have $8,000 in available credit. This gives you more flexibility than a fixed-rate home equity loan.

A HELOC has a variable interest rate that fluctuates over the life of the loan. Minimum payment due is interest monthly. Payments will vary depending on the interest rate and how much credit you have used. When the life span of a HELOC has expired any remaining balance must be paid off, converted to a term payment or renewed into a new HELOC based on a new application and appraisal.

A HELOC can be accessed by a direct tie to your checking account as an automatic advance, filling out a deposit request form in person, by telephone or through an Online Banking transfer.

Which type should you choose?

The answer to this question is seldom black and white. Here are some scenarios where the choice is obvious:

Let's say you need $7,000 to pay for your daughter's wedding next month and $3,000 to fix your roof. You know exactly how much you need and both amounts are due in full fairly quickly. If you don't have plans to borrow again, a term home equity loan for $10,000 is more suited to your purpose.

But if you need money over a staggered period of time -- for example, at the beginning of each semester for the next four years to pay for Jimmy's schooling or for a remodeling project that will take three years to finish -- a HELOC is the better choice. Another good use of a HELOC is for the financing of vehicles. A HELOC gives you the flexibility to borrow only the amount you need, when you need it. And if you borrow relatively small amounts and pay back the principal quickly, a HELOC can cost less than a home equity loan.

A Home Equity Line of Credit provides the following advantages:

• Flexible repayment schedule
• Re-paid amounts are available for re-borrowing in the future
• A 15 year loan maturity - which could remove the need for all future loan requests
• A low interest rate
• The interest paid on your loan may be tax deductible

Consumers who have run up credit card debt will often borrow a lump sum and pay off their Visa, MasterCard and department store charges. They then pay back the bank over time at a lower interest rate than the cards would have imposed. This sort of debt consolidation is the single most-popular reason people have for taking out HELOC and fixed-rate home equity loans.

To help you determine which loan best suits your needs, ask yourself:

• When do I need the money?
• For how long do I need the money? Is it for a short-term purpose, or a long-term?
• How long do I need to pay it off?

TrustBank is currently running a special promotion on Home Equity Lines of Credit! Click here for details about our great rates!

Home Equity Loans and Home Equity Lines of Credit -- See us today to discuss which option will work best for you!

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