Home Equity Loans: Types

Learn about the types of Home Equity Loans, including Fees and other Considerations

There are two basic types of home equity loans. The first types are "lump-sum" home-equity loans, where the interest rate and monthly payment is fixed for the term of the loan. The second type is termed a Home Equity Line of Credit (HELOC), where you apply for a limit amount and may then make withdrawals up to your limit. A HELOC acts more like a credit card which is secured by your home.

You may choose fixed rate home equity loans if you plan to use the money in a lump sum for a one-time occasion such as a home repair, auto purchase, or consolidating debt. The interest rate and monthly payment is fixed, so you can plan it into your budget using lump sum home equity loans.

You may choose a home equity line of credit (HELOC) if you will only need the money periodically, such as with a lengthy home remodel. This program gives you the option to borrow what you need, when you need it. Your payments will vary on the interest rate and how much credit you have used. A HELOC is based on a variable rate and moves up or down with the index rate it is tied to. Most banks index HELOC rates to the prime rate. Variable rate loans have a cap on how high the interest can climb over the life of the loan and a limit on how much, and how often, the interest rate can change for the year. A HELOC interest rate moves with short term interest rate indexes.

Be careful of introductory low rates (teaser rates) on home equity loans and HELOC programs. Payments can soar up once the introductory rate adjusts to the program rate.

A full home appraisal may not needed with home equity loans or HELOC programs. Often, the lender accepts a computerized estimate referred to as an automated valuation model (AVM), or a broker's price opinion (BPO). The AVM and BPO cost less than a full appraisal.

Home Equity Loans: Fees

Borrowers are assessed closing costs when taking out home equity loans or HELOC programs. These fees include such costs as attorney (or title agent) fees, title search, document preparation, insurance, property appraisals, and application fees.

The biggest cost you will pay with home equity loans or HELOC programs is the interest.

A HELOC can have annual maintenance charges, transaction fees, and inactivity fees if you don't use the account.

There may also be a prepayment penalty on both types of equity debt ( Home Equity Loans and HELOC programs), which are charged if you pay off or close your account before a pre-determined period expires.

There are home equity loans and HELOC programs available with no closing costs, but expect to pay a higher rate of interest to compensate.

Home Equity Loans: Decision

Deciding between home equity loans, HELOC programs, or refinance programs can be a difficult decision. It may help to go over the purpose for your loan and your tolerance levels.

Do you need the money in one lump sum, or in several installments? Is the money for a long term purpose such as a home improvement, or a short term purpose such as a semester of tuition? What is the maximum monthly payment you can afford? Will a variable rate of interest bother you?

Once a decision is made, be sure to get the terms of the loan spelled out so that you are aware of the conditions and will not have any surprises.

You can get pre-qualified for Home Equity Loans and HELOC programs right here at the Refinance Tool Box. We are here to help!

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