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Most Home Equity Loans Are Fixed-Rate: Here's What That Means

Home equity loans are usually fixed-rate lending options but aren’t as expensive as other fixed-rate options. You could be getting a loan or a line of credit depending on what you need. A local agent will help you avoid ending up deeper in debt than you intended.
Home equity loans are usually fixed-rate lending options but aren’t as expensive as other fixed-rate options. You could be getting a loan or a line of credit depending on what you need. A local agent will help you avoid ending up deeper in debt than you intended.

When homeowners are looking to improve their home or fund a new business, an increasing number of homeowners are pursuing home equity loans. Choosing a home equity loan for fixed rates is smart, as they’re not subject to the undulations of the market. Home equity is based on how much your home is valued at, minus how much you currently owe, meaning it’s how much you truly own.

Here is everything you need to know about home equity and whether fixed-rate lending is right for you.

Are You Looking for a Loan or a HELOC?

When deciding on what you’re looking for in funding, you might be confused with the distinction drawn between a home equity loan and a home equity line of credit. They have two very different impacts on homeowners.

A home equity loan is a standard type of term loan that arrives as a lump sum to be paid off during a set period of time that the loan holder signs off on at the time of application. For shorthand, some people call this a “second mortgage.” You’ll space your payments out with a loan and with enough equity, you can qualify for a large loan with a fairly low interest rate.

A HELOC is a lot more like a credit card in that you can borrow a certain amount, set by the lender, and withdraw as needed. Because you’re backed by a real asset in your home equity, you can apply for a line of credit much higher than a typical credit card. With this kind of line of credit, you can get up to $50,000 depending on your credit history.

Deciding Between the Two

One of the benefits of a home equity loan is that you get access to credit even if you have a poor credit history. However, people with a poor credit history should probably avoid HELOCs. They can get you into a lot of trouble in that when your home is up for collateral, a few wrong moves will ensure that you potentially lose your home.

If you don’t have a good habit of paying back your loans on time, a HELOC allows you to dig further and further while a home equity loan is based on one set expense. Your interest rate is going to depend on your credit score, so having your HELOC grow and grow could dig you into an ever deeper hole.

Either way, if you own more of your home than you owe on it, you’ll be seen as a low-risk candidate for a loan, meaning you’ll get more credit at a lower rate.

The Time To Avoid Home Equity Lending

There are some times when you might be tempted to get a home equity loan or a HELOC when it doesn’t make sense for you at all. You should avoid getting one if it’s going to make your financial situation worse than it is.

If you’re just going to sell your house soon, you might not pay off your loan or HELOC fast enough. You’ll need to pay off all of your debts before you can get rid of your home.

When you’re looking for quick cash in an emergency, you’re choosing to put the roof over your head at risk rather than take another type of loan. If you fail to pay the loan back, you’ll end up losing your home. People who are deeply burdened with debt should avoid home equity loans to avoid losing their home for the sake of a loan.

When to Choose a Home Equity Loan for Fixed Rates

When you’re working on making improvements around your home, a home equity loan is a great idea. Your loan can ensure that not only keep your home valuable but also help it to appreciate over time. If you have a fixer-upper, you might be tempted to get a HELOC but if you take the time to calculate your needs in advance, you’ll be able to use a home equity loan.

If you can foresee paying off your home equity loan, you should get one of those instead of a HELOC. However, if you’re in debt already, a HELOC might be a good solution to assist you in getting out of it. Since so many credit cards have interest rates as high as 20% or more, consolidating all that debt to a low-interest HELOC can help you pay it off sooner.

If you’re choosing to build wealth with your home equity loan by investing in other types of property, partnering with an experienced real estate agent will provide you with support. The process of investing in a second home or non-residential property is confusing but using the wealth you’ve already built can lead to building more wealth. An experienced local agent is going to be able to save you money by helping you score rebates at the closing and navigate the confusing world of financing.

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Ben Mizes

Ben Mizes is the co-founder and CEO of Clever Real Estate, the free online service that connects you with top agents to save thousands on commission. He's an active real estate investor with 22 units in St. Louis and a licensed agent in Missouri. Ben enjoys writing about real estate, investing, personal finance, and financial freedom. He's a serial entrepreneur, having run several successful startups before Clever Real Estate. Ben's writing has been featured in Yahoo Finance, Realtor News, CNBC, and BiggerPockets.

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