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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?
Home Equity
Loans and Home Equity Lines of Credit -- See us today to discuss
which option will work best for you!
Click
here to view a list of TrustBank locations and hours.
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Home Equity Loans & Lines of Credit Personal
