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Are
you considering refinancing your mortgage to pay off debt or to make
improvements to your property? If so, then a home equity line of credit, or
HELOC, may be just the way to go.
A HELOC is a loan which is tied to your home's value. HELOC’s have two
options; the first is set up as a revolving line of credit with an adjustable
interest rate which is indexed to the prime rate. The second type of HELOC
gives you a fixed-rate option, allowing you to leverage your home equity into
cash, refinancing, or for
debt
consolidation.
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Whichever option you choose, a HELOC generally offers a lower interest
rate than other types of loans. They also offer you the ability to get
cash whenever you need it and for whatever use you choose. For example,
you can take money from your line of credit by writing a check, by using a
specifically designated credit card, or in a variety of other ways. A HELOC also gives you access to the equity that's been built up in your home - an often-large amount of money that you might otherwise not be able to tap. This allows you to use the equity for other purposes if you so choose to. |
HELOC’s can have benefits for many different kinds of borrowers. For example,
if you are a first-time homebuyer who put down less than 20% when initially
financing your
home, you're probably juggling two loans or paying costly private mortgage
insurance (PMI). Private mortgage insurance is an insurance policy for your
lender, not you, which you pay each month if your loan-to-value is more than
80%. Even if you have a fixed-rate mortgage to cover the principal and
interest on your home, your PMI payment is subject to rising interest rates and
it just like throwing money out the window each month.
Because of rising interest rates, rolling your two
loans together or
getting rid of your PMI payments can be a great way to save some money and
guard against future interest rate hikes. You can accomplish this through a
refinance and taking out a home equity line of credit on your home.
If you're considering a debt consolidation mortgage, a HELOC will allow you to roll credit cards and other consumer debt into a loan with a much lower rate. For example, credit cards often charge an annual percentage rate of 25% or more, while HELOC rates are usually less than a quarter of that amount.
When shopping for a HELOC loan, make sure to ask lenders about introductory rates and periods, margins, minimum withdrawal against the line of credit, required average balance, and up-front fees as well as any annual and cancellation fees. The last thing you want is to have to pay a bunch of junk fees and costs.
Keep
in mind that since variable-rate HELOC’s are tied to the prime interest rate,
your payment will adjust with each rate change if you choose a variable rate
HELOC. For that reason, you might want to consider a fixed-rate HELOC which
will have one rate over the entire life of the loan. It's generally best to go
with adjustable-rate
loans if you plan
to stay in your
house for a short
(less than 5 years) time, but if you want to stay in your
house for a longer
period, then a fixed rate HELOC may be the better choice. And as with any
financial decision, do your research before signing on the dotted line and talk
to your financial planner.
©2009 Best Refinance Mortgage Rates