Home Equity Loan Interest Rate - Comparing the Two. Both types of home equity-financing options are also referred to as "second mortgages" because they are secured by your property, just like the original (primary) mortgage. However, unlike the primary mortgage, these loans typically come with shorter repayment periods of anywhere from five to 15 years. Home-equity loans are ideal for borrowers who prefer the security offered by fixed-interest rates and for those requiring a substantial sum for a specific purpose, like another investment or debt consolidation (remember, it's a one-time loan – additional money cannot be withdrawn). HELOCs are suited to individuals who need access to a reserve of cash over a period of time, rather than upfront. You're never paying interest on more borrowed funds than you actually use at any one time.
Your ability to borrow using either refinancing or home-equity loans depends on your credit score. If you're looking to refinance, and your credit score is lower than when you originally purchased your home, refinancing may not be in your best interests. Before going through the process of securing either of these methods, get your three credit scores from the trio of credit bureaus. (See Top Places to Get a Free Credit Score or Report.) If they aren't above 740, talk with any potential lender about how your score might affect your interest rate.
Refinancing and home equity loans have downsides, of course. If you're refinancing, try not to take on another 30-year loan. Instead of putting the money you save into your pocket, opt for a shorter duration loan – maybe a 15-year mortgage. Or, take a 30-year loan and make extra payments. Remember that the payment isn't as important as the total amount of money you pay over the life of the loan. Paying on your first loan for 10 years and refinancing for another 30 probably cancels out any positive effect of the refinance. The goal should always be to eliminate debt as quickly as possible.
A home equity line of credit (HELOC) is kind of like a credit card tied to the equity in your home. You can borrow as little or as much of that credit line, with an open-ended term, as you want. You may be required to pay a transaction fee each time you make a withdrawal, and an inactivity fee if you don't use your line of over a given period. During the draw period you pay only interest. Once the repayment period kicks in, you pay principal and interest.
Taking out a home-equity loan or a home-equity line of credit demands you submit various documents to prove you qualify, and imposes the same fees as a mortgage. These fees include closing costs such as attorney fees, title search and document preparation. They also often include an appraisal to determine the market value of the property, an application fee for processing the loan, points (one point is equal to 1% of the loan) and an annual maintenance fee. Sometimes, lenders will waive these, though; so do ask.
In addition to disbursing the funds in disparate ways, interest works differently on these two instruments. The traditional home-equity loan has a fixed interest rate (though some may be adjustable) and the HELOC has a variable interest rate. The APR for a home-equity line of credit is calculated based on the loan's interest rate. The APR for a traditional home-equity loan generally includes the costs of initiating the loan.
Data as of March 2017. Comparison of longest average store hours in the regions (MSAs) in which TD Bank operates compared to major banks. Major banks include our top 20 national competitors by MSA, our top five competitors in store share by MSA and any bank with greater or equal store share than TD Bank in the MSA. Major banks do not include banks that operate in retail stores such as grocery stores, or banks that do not fall in an MSA.
If you're not planning to stay in your home for a long period of time, a home-equity loan, might be the better choice since the closing costs are less than those of a refi.
Refinancing is basically finding a new lender to pay off your old mortgage balance in exchange for a new mortgage at a lower rate. Sometimes your current lender will do a refinance, too.
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