Fixed rate home equity loan :: Fixed rate mortgage loans :: Equity line of credit

Mortgage Lending Guide: Fixed Rate versus Line of Credit Loans

Fixed Rate vs. Line of Credit Loans
… and the new "Blend"

When you know exactly how much money you need, and you need it all immediately, you may decide to choose a Fixed Rate Loan. This is just like any other second mortgage. It has a fixed monthly payment and is all due and payable at a specified future date.

However, the new trend is toward Line of Credit Loans for Home Equity or Home Improvement. These loans have advantages, and disadvantages.

First, the advantages:

• You can charge your home improvement (or other) costs on your credit card each month and then take a draw from your home equity loan to pay the balance in full each month - thereby giving yourself one month (or portion thereof) at no interest.
• You take only the amount you need and pay interest only on the amount you've taken
• As you repay the loan, you give yourself more available credit. For instance, if you have a line of credit for $20,000, borrow all of it, and pay back $10,000, you can then re-borrow that $10,000 without filling out new paperwork, re-qualifying, etc.
• Some are "interest only" for the first few years, which saves on monthly outgo and helps cash flow if you are using the money to remodel before a sale, etc.

As with everything, there are two sides. The disadvantage is that the Line of Credit Loan comes with a variable rate interest. You could start at 8% and find yourself paying 10% within a short time. This rate is tied to the prime rate, which has been fairly stable in recent years. However, it carries no guarantees.

The "Blend"

This loan offers you the opportunity to fix the rate on a portion of the money you've borrowed. Say you have a line of credit for $70,000 and you've borrowed $49,000 to make home improvements. You are allowed to "fix" the rate on the $49,000 so that you have a regular monthly payment and can rest assured that the interest will not go up.

Sometimes the fixed rate will be less than the variable rate you are paying at the time you decide to exercise this option.

The balance of the money will still be available for your use and you can draw against it as a Line of Credit Loan. Some lenders will allow you to "fix" more than one portion of your Lien of Credit.

Your Mouse House Mortgage loan advisor will help you weigh the benefits of each type of loan, so that you can make an informed choice - the choice that is right for you.