Varieties of Home Equity Loan
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Home equity loans are an excellent method of tapping the value of your home because they allow you to borrow against the money you have invested in your mortgage. Arkansas home equity loans use your home as collateral. This means that in the event of nonpayment the lender can force you to sell your home to recoup their debts.
Home equity loans come in two main types: home equity loans and HELOCs, which are home equity lines of credit. Although you can receive the same amount of money with a home equity loan or a HELOC, they each have unique features and it’s important to understand how they are similar and on which points they differ.
Cash Up Front: A Home Equity Loan.
Arkansas home equity loans provide you with the entire value of the loan up front. That is, if you are granted a $15,000 home equity loan, you will receive $15,000 in your bank account. Depending on the terms of the loan, you may need to start repaying the loan in 1 month, or you may have a grace period of several months before paying the loan back.
When you do start repaying the loan, you will owe a fixed amount per month until both the principal (the $15,000 you receive up front) and the interest are paid back.
Cash When Needed: A Home Equity Line of Credit
Think of a Home Equity Line of Credit like a credit card. The bank, or lender, establishes a line of credit, which allows you to spend up to the set amount of the credit line; in our example that’s $15,000. The key difference is that you don’t receive the money all at once. You may receive special blanks checks to write against the balance or a plastic card. Either way, you don’t receive the money right away but it’s there when you need it. Of course, you can spend the money right away but you don’t have to.
You can also spend parts of the HELOC at different times. For example, you may decide to remodel your home. You can use your line of credit to add a deck, spending $1,000. That leaves you $14,000 in your line of credit. A month later you decide to install custom-built cabinets and a new convection oven for $10,000. You still have $4,000 left in the account. Also, like a credit card the money becomes available to you as soon as you pay it back. For example, you repay the lender the $1,000 spent on the deck project. You now have $5,000 in your line of credit that can be borrowed against. All HELOCs have two ‘phases’. First, there is a draw period, when you can use or ‘draw against’ the total credit limit up to the total value of the line of credit. During the draw phase, you can either pay the interest that accrues against your expenses or you can make payments on the principal to free it up. The second phase is the repayment period, where you can’t draw on the line of credit anymore and must make full repayment.
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