Refinancing: An Equity Line or Not?

Many people consider using the equity in their home when they get themselves in a financial crunch. Often, individuals will use the new loan to pay off credit cards, student loans, and possibly auto loans. In the last several years the Home Equity Line, also (HELOC) called a Line of Credit, has become rather popular. But is this better than just getting a 2nd fixed mortgage? There are a few things to consider before answering that question.

The first thing to consider is the interest rate. A 2nd mortgage will often have a fixed interest rate. On the other hand a HELOC will have a rate that changes based on market conditions. Depending on the nature of the HELOC it could change once a year, twice a year, or even quarterly.

The second item to consider is the terms of the two loans. A 2nd mortgage will give the borrower a lump sum of cash at closing with pre-determined payment amounts and number of payments. A HELOC has a minimum payment amount, similar to a credit card, and no set term. This can lead some borrowers to simply pay the minimum amount and over time have no real impact on the loan.

This leads to another point to ponder. For people that are using the loan to pay off a lot of credit cards, do they really want a bigger credit card to worry about? A HELOC works very similar to a credit card. With a pre-determined credit line, every time a payment is made the borrower now has access to a new limit. Anyone that has suffered with credit cards may find this a virtual trap of never escaping debt.

A HELOC loan has wonderful interest rates and it can be a benefit to some borrowers. Before pursuing such a loan, consider all of the parameters of the loan before signing on the bottom line.

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