Are you finding yourself in need of relief from high interest debt or wanting to complete costly home and auto repairs, or pay medical expenses? The first option many will look at is a personal loan, but it’s important that homeowners know how their equity can help.
A personal loan, which is a type of unsecured loan, lacks collateral and as such has a much higher risk attached. These generally have much higher rates of interest than secured loan options and offer terms of 36 months or less.
A title loan allows the outright owner of a vehicle to take a loan out against that vehicle. Since the vehicle offers some collateral for the loan, this is slightly less risky for the banks and they may offer slightly lower rates, and terms as long as 60 months.
Home equity loans or lines of credit (HELOAN, HELOC) offer the longest terms of these options, usually 10 or 15 years (120 to 180 months), and generally far better interest rates than either of the previously mentioned option.
with a home equity line of credit, or HELOC, you may have a draw period (where you can spend available credit) and a repayment only period. Payments are calculated as you spend, so they grow over time. This is because your payoff date stays the same. In English, the later you use a HELOC, the higher the payment will be each month. Since HELOCs also generally have a variable rate, this can mean your payment at first and your payment in the future may differ greatly. This can get you into some hot water, or save you money in the long run but since nobody can predict the future, it is safest to air on the side of assuming rates will go up, not down.
Which leads to HELOANs. Since HELOANs usually have a fixed rate, and are based off a single disbursement of funds, your payment at the beginning will be the same as your payment at the end. This predictability makes it a more manageable option to some borrowers.
Taking all of this into account, in most cases a fixed-rate home equity loan is the best option for consolidating debt. While the current rate environment may scare some clients, it’s important to remember a home equity loan or line of credit won’t affect the terms of your first mortgage, and if you’re using it to consolidate debt or make improvements to your property the upside in saved interest from those debts or the increased value to the property after improvements can make it a net positive move for most borrowers. Should rates improve, or payments get untenable as terms grow short, a borrower may be able to refinance for a lower payment, lower rate, or both for an even more substantial long-term benefit.