These are 8 of the most commonly asked questions in relation to deciding whether to take out a Home Equity line of credit or a home equity loan!What is a Home Equity Line of Credit?This is often referred to as a HELOC and it is a line of credit that is set with a maximum draw down limit. This line of credit is set up between you and your lender and an amount is agreed upon. This can be up to 80% of the market value on the home less any fees currently outstanding. This equity line can then be drawn out over a set period of time.What are the interest rates charged on an HELOC?Interest rates for Lines of credit are usually variable – this reflects the higher credit risk to the lender. Rates can vary from 11% to 18% depending on the credit score of the applicant.
Do I have to get an appraisal done on my property to qualify?Most lenders have an appraisal required before they will accept an application. Some lenders will only ask for an appraisal where the line of credit being applied for is in excess of $50,000, these are usually credit unions.
Why should I consider a HELOC instead of a Home Equity Loan?If you need an amount of money over a period of time and you are not sure how much then a HELOC makes more sense because you only pay interest on what you borrow. Many borrowers prefer to have the accessabilty to money ‘just in case’ rather than taking a fixed amount out ‘now’ for a pre determined duration as would be the situation with a Home Equity Loan.Is there any collateral required?Yes, is the simple answer. A HELOC and a home equity loan require security. This security is on your home and would be in the form of a lien on your property.If I take out a HELOC what fees could I expect?A HELOC has cheaper fees when it comes to pre payment or settlement – usually around $1,000 on a $150,000 line of credit (about 0.7%) of the total. This compares favorably with a settlement cost of about $2,500 – $5,000 for a home Equity Loan (1.6% -3.2%) – a considerable saving! Other fees though, can be more expensive i.e. appraisal fees. In general a HELOC because of these ‘other fees’ can be slightly more expensive – but not much!
Do I have to have good credit to take out a HELOC?No. If your credit is bad though you will pay more money.Are there any disadvantages to taking out an equity line?Borrowers usually opt for longer term payments than they should! This means that the items purchased tend to last less time than the debt i.e. a new car! The longer the payment term then the ‘more’ money has to be repaid – so it can become an expensive means to gain finance.In addition borrowers with poor credit should be aware that the circumstances that contributed to obtaining a poor credit standing need to be addressed – otherwise if the borrower fails to make repayments there is an added risk of foreclosure!I hope this Equity Line FAQ has been helpful. As with all major financial loans or investments – you should always try and find out as much as you can from a financial adviser, broker or even online.