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What's the Best Home Equity Loan for You? - Closed End? Open End Line of Credit?
Freddie Mac estimates that Americans took $556 billion out of their homes through cash-out refinance transactions and home equity loans since 2004. However, because mortgage rates have gone up in recent times, home equity loans have been edging out refinances in popularity for tapping into home equity for much-needed cash.
If you're one of many people who got their first mortgage during the time when interest rates were at historic lows, or refinanced during that time, you wouldn't want to refinance now. That wouldn't make much sense. So, the best choice is a home equity loan, also known as a second mortgage.
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Choose from Fixed Rate Loans or Flexible HELOC's |
A 2nd mortgage is a loan that allows you to get cash from your home equity without affecting the terms of your first mortgage. Freddie Mac estimates that Americans took $556 billion out of their homes through cash-out refinance transactions and home equity loans since 2004. However, because mortgage rates have gone up in recent times, home equity loans have been edging out refinances in popularity for tapping into home equity for much-needed cash.
If you're one of many people who got their first mortgage during the time when interest rates were at historic lows, or refinanced during that time, you wouldn't want to refinance now. That wouldn't make much sense. So, the best choice is a home equity loan, also known as a second mortgage. A 2nd mortgage is a loan that allows you to get cash from your home equity without affecting the terms of your first mortgage.
Home equity loans are popular for not just for funding home improvements or buying second homes, they are also popular for debt consolidation because they are simple interest loans. This allows you to finally pay off compounding interest credit cards where the balance generally increases rather than decreases when you make the minimum monthly payments.
The question that remains now is whether you should get a closed end home equity installment loan (HEIL) or open end home equity line of credit (HELOC). It all depends on whether you need your money in one lump sum or on an on-going basis. Find out all about different types of home equity loans: fixed rate, interest only, HELOC, balloon, etc. to determine which is best for your needs.
Closed end HEILs are typically fixed interest rate loans, although, there are also interest only and balloon payment options that you can explore if you're particularly strapped for cash. Open end HELOCs are variable rate loans with revolving credit lines. With a HELOC, you have the option of making interest only payments or paying down the principal, so you can reuse the credit line without refinancing or having to apply for a new loan. Then, they usually become closed end adjustable rate HEILs where you make monthly principal and interest payments.
In making the loan decision, I wouldn't recommend a balloon payment unless you know for certain you can refinance the loan when the balloon payment comes due. Whether to choose a closed end HEIL or open end HELOC depends on whether you are interested in paying off the loan and having it close or if you'd like to have an open credit line available as you need it.
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