I feel fortunate to have survived the pandemic relatively unscathed thus far, but stories from friends and family members have definitely been a bit of a wake-up call. I’m thinking about taking out a home equity loan on my condo so that I can have access to funds in the future, but can you break down the world of home equity loans a bit? — Condo Conscious
Before we get into the details, good on you for considering all your options. The initial economic shock of this pandemic caught a lot of people by surprise, so it’s natural to look for ways to find stability as time goes on. Like so many other subjects in the world of finance, loans can be a great option if you take the time to do your research and make an informed decision. That’s why you’re here, right? Let’s get into it.
Know Your Situation
As you get your bearings, the specifics of your situation may help determine whether a home equity loan or a home equity line of credit (the latter is often referred to as a HELOC) will work best for you. For both of these, the amount you receive is based on the amount of equity you have in your home. But, they do have their differences and it’s important to take those into account.
A home equity loan provides you with a lump sum of money that must be repaid over a fixed period of time at a fixed interest rate. On the other hand, a home equity line of credit is a revolving account that lets borrowers draw money up to the available maximum amount, then repay the money (with interest) and then draw it again. While a home equity line of credit allows you to draw only the funds you need when you need them, it should be noted that they often come with an adjustable interest rate. This means that the amount you pay in interest could change over the course of having the home equity line of credit. Knowing these differences can help you determine which one to pursue.
Know the Details
As a rule, you need to know all the details when you’re considering either a loan or a line of credit. There are many factors to consider, like the length of time (sometimes referred to as the term), the interest rate, whether or not that interest rate is fixed or adjustable, the tax benefits and any associated fees. Home equity loans and home equity lines of credit are unique: Unlike a personal loan or personal line of credit, they require collateral in the form of, you guessed it, your home or in this case, your condo.
Know the Risks
It’s crucial to be aware of the risks when taking out a loan or line of credit, especially on your home. For example, as mentioned above, a home equity line of credit typically has an adjustable interest rate. So, in a rising interest rate environment, you could end up paying more depending on the outstanding balance on your line of credit. An additional thing to keep in mind is that if you make late payments on a loan, your credit score could be affected. In short, it’s a best practice to make loan payments on time and to pay lines of credit down as quickly as possible. And of course, it’s very important to keep in mind that your home is on the line if you fail to make payments as required by the terms of your loan or line of credit. So, be aware of other credit resources if repayment on a home equity loan or home equity line of credit may be an issue.
Knowledge Is Power
A loan or line of credit can be a powerful tool to prepare for the future if you do your homework and act with discipline. As you assess your situation, your options and your risk tolerance, you’ll start to see the air clearing and the best choice for you becoming more apparent. As always, if you feel like an expert opinion is needed, we're ready to help.
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