If you are in the market for credit, a home equity plan is one of several options that might be right for you. Before making a decision, however, you should weigh carefully the costs of a home equity line against the benefi ts. Shop for the credit terms that best meet your borrowing needs without posing undue fi nancial risks. And remember, failure to repay the amounts you’ve borrowed, plus interest, could mean the loss of your home.
If you’re interested in borrowing against your home’s available equity to pay for other expenses, you have choices. One option would be to refinance and get cash out. Another option would be to take out a home equity loan or line of credit. Here are some of the key differences between a: cash-out refinance and a home equity loan or a home equity line of credit (or HELOC)
A home equity line of credit (often called HELOC and pronounced Hee-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower’s equity in his/her house (akin to a second mortgage). Because a home often is a consumer’s most valuable asset, many homeowners use home equity credit lines only for major items, such as education, home improvements, or medical bills, and choose not to use them for day-to-day expenses.
Home Equity Loan terms
Cash-out refinance: completely replaces your existing first: mortgage. This restarts the: term of the loan (meaning it can change your interest rate and type of mortgage, as well as reset the term of the loan). It also results in a new payment: amortization schedule, which shows the monthly payments you’d need to make in order to pay off the mortgage principal and interest by the end of the loan term.
Home equity loan or line of credit: is taken out in addition to your existing first mortgage; it doesn’t replace it. It will have its own term and repayment schedule, separate from your first mortgage, and is considered a second mortgage.
How you receive your funds
Cash-out refinance: you receive a lump sum when you close your refinance. The loan proceeds are first used to pay off your existing mortgage(s), and any remaining funds are yours to use.
Home equity loan: you receive a lump sum when your loan closes.
Home equity line of credit: you’ll receive access to a line of credit that you can draw from as needed during the permitted draw period. Although the size of the credit line can change at the lender’s discretion, you’re typically allowed to borrow as little or as much as you like, up to the maximum limit of your credit line.
Cash-out refinance: can typically offer a lower interest rate than other types of equity loans.
Home equity loans: are fixed-rate loans. Throughout the life of the loan, you’re protected from payment fluctuations as the interest rate remains fixed. Rates for home equity loans can often be higher than for other types of equity loans.
Home equity lines of credit: are usually adjustable-rate loans that change with an index (usually The Wall Street Journal Prime Rate). Your lender may also offer you a fixed-rate loan option. Bank of America home equity lines of credit include this fixed-rate conversion option. This would allow you to convert all or just a portion of the principal you owe on a home equity line of credit to a fixed rate. Home equity lines of credit typically carry lower interest rates than home equity loans, although if the rate on a HELOC is adjustable, the payment could increase significantly in the future.
Cash-out refinance: will incur closing costs similar to your original mortgage.
Home equity loans and lines of credit: usually have no, or relatively small, closing costs.
If you think that borrowing from your available home equity could be a good financial option for you, talk with your lender about cash-out refinancing, home equity loans, and home equity lines of credit. Based on your personal situation and financial needs, they can provide the information you need to choose the best option for your situation.
Benefits of Home Equity Loans
-Payment choice: Choose between principal and interest or interest-only payments.
-Ongoing accessibility: Access available funds now and in the future to pay for home improvements and other recurring expenses, without reapplying.
-Flexibility: Adapt to changing interest rates without refinancing-convert all or part of the line balance into a fixed-rate advance, for predictable monthly payments.
-Potential tax benefits: Unlike personal loans or credit cards, the interest on your home equity financing may be tax deductible.
-Relationship discounts: You may be eligible for relationship discounts up to 0.375% with a qualified Wells Fargo deposit account and automatic payments.
The interest rate on a home equity line of credit is variable, so your monthly interest-only payment may change according to the market rate unless you convert to a fixed-rate advance.
While an interest-only plan may provide a lower monthly payment, your principal balance is reduced only when you make voluntary principal payments during the interest-only period. At the end of the fixed-rate advance (FRA) term, any unpaid FRA balance reverts to the variable rate in effect on the home equity line of credit at that time.