Home Equity Loans And Lines of Credit - How They Work

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Home Equity Loans And Lines of Credit - How They Work
Whether you need a down payment on a car, a new computer, or are experiencing life changes such as a new addition to your family or are financing a business or education, you can use the equity in your home to obtain the money that you need. The equity in your home is the difference between your home's market value and the amount you owe on your home.

Home Equity Loans Basics

Home equity loans, also refereed to as a second mortgage loan or a cash-out refinancing loan, are common place. The advantages to these loans are that they usually have lower interest rates than consumer loans, have fixed payments that are predictable, are backed by your home's equity, and in most cases, are tax deductible.

The biggest disadvantage to home equity loans is that you absolutely can not default on this loan in any way, or you may lose you home. Another disadvantage is that you may use up the equity that you have built in your home, which results in a longer pay off period for your home.

Home Equity Line of Credit Basics

A home equity line of credit is revolving credit that you can obtain by using your home as collateral. This option is very similar to obtaining a new, shiny credit card with a very large limit: the equity on your home. The term is defined by a draw period that allows you to borrow money from the line. The payment each month is based upon the outstanding balance owed. As payments are applied to principal, your available credit increases accordingly.

The biggest advantage is that the interest rate you pay on the average home equity line of credit is generally lower than the interest rate you will pay on a credit card or other type of non-secured debt. Also, you can usually deduct the interest you pay, but be sure to consult with a tax counselor concerning the deductibility of interest.

The most notable disadvantage to a home equity line of credit is that your home is used as security. If you default on your payments you could lose your home. Also, if you decide to sell your home before paying off the line of credit in full, the amount will be paid from the sale price.

Here are our Recommended Home Equity Loan Companies Online.

Carrie Reeder is the owner of ABC Loan Guide, an informational website about various types of loans.

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Loans - How Fixed Interest Rates Work

Interest rates are an important part of any loan or credit line. The interest rate that you have on your loan, credit card, or other credit line can seriously affect the total amount that you pay toward repayment; after all, that's how lenders make their money.

All interest rates are not the same, however... some rates will fluctuate over time as local and national interest rates change, whereas others are set at a certain level and remain at that level until the loan or credit line is repaid in full.

Below you'll find information on the latter type, which are known as fixed interest rates.

Defining Fixed Interest Rates

A fixed interest rate is one that remains at a specific rate regardless of the increases and decreases of interest rates locally and nationally. This means that if an interest rate is fixed at 10%, it will remain at 10% until the loan or credit line has been paid off whether other rates increase to 20% or drop down to 5%.

These rates are sometimes offered for an introductory period to add security to a new loan or credit card, after which the interest rate reverts to a variable rate meaning that it fluctuates with the increases and decreases of other rates.

Advantages of Fixed Interest Rates

Obviously, the main advantage of a fixed interest rate is that you can guarantee your interest rate against future increases. This is especially useful in situations where you find a particularly good interest rate and manage to lock it in as a fixed rate. No matter what increases come while you're making your payments, you still maintain your good interest rate.

Another advantage of a fixed interest rate is the fact that fixed rates that are used in a promotional manner (as in the case of introductory rates and the like) are usually significantly lower than other rates that are available.

Even though introductory fixed rates expire after a time (usually 6 months or 1 year), you still save money on your payments during this time and can take advantage of this to try to get ahead on your payments so that you have fewer payments to make at a higher rate.

Disadvantages of Fixed Interest Rates

Of course, fixed interest rates aren't without their disadvantages. The major disadvantage of fixed rates is the fact that when interest rates drop below the rate that you are paying, you still have to pay the higher rate.

This can be particularly troublesome in the case of mortgages or automotive financing, since interest rates can drop and remain low for relatively long periods of time... meaning that you're having to pay the higher rate until the variable rates rise again.

Another disadvantage is that when promotional rates end there is usually a much higher variable rate that has to be paid, resulting in a sudden increase in your monthly payment that you might not be expecting... after all, you've been paying the lower rate for a while, and you might have gotten used to the payments.

Common Places to Find Fixed Interest Rates

Fixed interest rates can appear in a variety of places, ranging from automotive financing and mortgage loans to debt consolidation and homeowner loans. They are often used as an introductory rate for automotive financing and credit cards, though some mortgage lenders use them in a promotional manner as well.

The availability of fixed interest rates depends upon the individual lender, so be sure to look into whether they are offered or not before expecting to receive one.

You may freely reprint this article provided the following author's biography (including the live URL link) remains intact.

John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the http://www.directonlineloans.co.uk website.


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Home Equity Loans And Lines of Credit - How They Work
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