Perhaps you’d like to take out a loan against your home’s equity, but have heard interest rates are expected to climb soon. You may also be asking yourself what the differences are between a home equity line of credit (HELOC) and a home equity loan and how does an environment of rising interest rates impact each choice?
Financial experts are predicting an interest rate hike or multiple hikes this year. With rising rates, borrowing against a home's equity will likely become a more popular choice. That’s because people will choose to fund home renovations and other high-priced needs with their equity instead of moving to a new home with a mortgage that has a higher interest rate.
With increasing interest rates, refinancing your existing mortgage for a lower payment will no longer be viable, so here are some basics you’ll want to know about each kind of loan.
How a HELOC Works
A HELOC is a revolving credit line that allows you to borrow money as needed, with your home serving as collateral for the loan. You can spend the funds however you choose, though some plans have restrictions on the amounts and ways you can borrow.
HELOCs allow for financial flexibility. You can withdraw money as needed over an amount of time known as the draw period. This is especially beneficial if you don’t know exactly how much money you’ll need.
Repayment options vary, but are also usually very flexible. When the draw period ends, some lenders allow you to renew the credit line while others allow you to make payments over another set time period.
Monthly payments also vary. Some only require interest-only monthly payments and then collect the entire principal at the end of the draw period. This can be beneficial when borrowing for an investment which will hopefully yield a sizable payoff.
HELOCs that require repayment of principal only at the end of the term can prove to be difficult for borrowers. If you can’t pay the large amount, you’ll be forced to refinance possibly at an unfavorable interest rate.
HELOCs have variable interest rates—the interest you’re paying on the loan fluctuates over the loan’s term. Taking out a HELOC in an environment of rising interest rates means your rates are likely to increase over the life of the loan.
Lucky for you, Partner Colorado’s HELOC currently offers a new rate lock option. Enjoy peace of mind that your rate will stay the same even if rates rise. You can lock your rate up to three times during the draw period for 10 years. You can also request to lock in a rate at your loan closing or anytime during your draw period. Visit our Home Equity page for more details.
How a Home Equity Loan Works
A home equity loan, secured by your home’s equity, allows you to borrow a fixed amount in one lump sum. Most home equity loans have a fixed term, so you make the same payments each month.
Home equity loans have fixed interest rates so the borrower knows exactly what the monthly payment will be for the life of the loan. In an environment of rising rates, this is especially beneficial because the loan won’t be subject to increasing rates. Every monthly payment on your loan is made up of both principal and interest. You’ll pay back the entire loan, in manageable amounts, until the loan is paid off.
If you prefer a fixed interest rate, consider a home equity loan from Partner Colorado. We offer generous term options with competitive rates.
There can be fees attached to home equity loans. Receiving all the funds at once can also be problematic if you find you need more than the amount borrowed.
Carefully weigh the pros and cons of each kind of loan before tapping into your home's equity. Be sure to calculate whether you can really afford the monthly payments.
Call or stop by a Partner Colorado branch to find out about the home equity loans we have available for you.
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