Home Equity Loan Fixed Rate
What is the difference between a home equity line of credit and a home equity fixed rate loan? The difference is the interest rate and the length of the loan. A home equity line of credit is a line of credit for a certain amount that is based on the equity in your home. The line of credit is available when you need it and you only pay on it when you need it. The line is available indefinitely with no closed end. The interest rates on home equity lines of credit are variable and are tied to the prime rate. If the prime rate is low, the rate is great, but if the prime rate goes up, and you have borrowed against your line of credit, you will be paying the higher interest rate. Your budget will thank you for the predictability of a fixed rate on your home equity loan.
The benefit of a fixed rate home equity line of credit is just that. The rate on the loan stays the same and there is a beginning and end to the loan. It’s like a regular second mortgage loan for a set amount, taken against the equity in your home. The rate is usually higher than a variable rate line of credit. However, sometimes it might be less to get the fixed rate, depending on how the economy is at that time. Most people use this type of loan to purchase a car. Since the loan is based on the equity in your home, the interest paid could be tax deductible.
Another reason people take out a home equity fixed rate loan is to do a home improvement project. Find some contractors, get estimates on what the project will cost, and when you finalize the price, you can apply for the loan. Again, it will start when you take out the loan and end 24, 36, 48 or months after you take it out. You won’t have to worry about the rate going up 2 or 3 years down the road if interest rates go up.
If you have balance on other loans or credit cards, you might want to consider a home equity fixed rate loan to consolidate the balances into one loan. And again, since the loan is tied to the equity in your home, you may be able to deduct the interest on your income tax return. The goal in this scenario is to minimize the interest you pay on borrowed funds. If you are consolidating credit cards, don’t take out a long term home equity fixed rate loan, because in the end, what you pay on those credit cards will be more than if you had left them alone. It costs a lot more to borrow $5000 for 10 years, than to make additional interest payments to the credit cards and get them paid off early.
Something else you’ll want to be careful of, if you roll your debt into a home equity loan. Cancel or cut up your credit cards, and be careful not to let them creep back up again.
Some fixed rate home equity loans are used as a down payment on a new home. If your house is up for sale and you find a house you want to make an offer on, you can tap into the equity in your current home in order to put money down on your new home. Another name for this type of loan is a bridge loan. Then when you sell your house, the home equity loan and the mortgage loan on your original home will be paid off out of the proceeds.
Do you have kids heading to college? A fixed rate home equity loan can help with the costs of college, if student loans are not an option. With all the loans, it’s best to shop around for the best rates. Make sure you compare upfront fees, if any. What is the interest rate, and if there is any prepayment penalties if you pay the loan off early. Read the terms and conditions of the loan so you are well informed about them.
Last but not at all least, know that when you take out a home equity line of credit or fixed rate home equity loan, you are putting your house at risk. If you are not able to make payments, the collateral for the loan is your home, and you risk foreclosure. Also, some banks will let you borrow up to 120% of what your home is worth. If you had to sell your home and still owed that amount, you would be “upside down” on the loan. That means that you owe more than your home is appraised at. Instead of collecting the equity earned on your home at closing, you will be trying to come up with enough money to pay off the home equity loan so they will release the home to the buyers.
