What Are The Costs Involved In Home Equity Loan
by Alan Lim
Your home is truly an asset. If you manage to build up sufficient amount of equity around it, then you could go for a home equity loan. However, be sure to know the costs that come along with it
Most home equity loan schemes come with attractive discounts and lucrative offers. However most borrowers do not realize that while initially the costs may seem lesser, from a long term perspective, the costs can work out to be quite a lot. For instance, the closure fees are usually quite steep in the case of the home equity type of loan. Even the associated fees and expenses can be much higher than regular loans in the market. Most often lending institutions hike up these rates in order to compensate for the lesser rate on interest. In addition to these fees and associated expenses, the borrower also needs to pay the interest for a period of time.
One of the main advantages of a home equity loan is that the interest on it is tax deductible. You can consult with the accountant in your office in order to get a better idea of how it works. This can really work to your advantage if you plan on borrowing a small amount. This can save you a much higher amount as opposed to a regular line of credit that doesn’t work up that much savings. This is of course taking into consideration the closing costs as well as all associated fees of the loan.
Tenure of the loan
Another aspect that will largely determine the overall costs of a home equity loan is the duration of the loan. You may be misled into thinking that stretching the repayment over a longer term can result in smaller monthly payments and save you money, but it is actually the other way round! The longer the overall duration of the loan repayment period, the more costly it can work out to be in the long term. It is primarily because you end up paying interest for a much longer duration. This often exceeds the original sum of the mortgage. So while a shorter loan duration will result in larger chunks of payment each month, it is still much cheaper when considered on a long term basis.
Home equity loan vs. line of credit
Many people tend to get confused between a regular home equity loan and a home equity line of credit. However, the two are quite different. In the case of the loan, the interest rate is usually fixed while in the case of the line of credit, the interest rate is of the adjustable variety. This means that the interest rates will fluctuate depending on the prevailing market conditions. Thus a subtle difference between going for a loan or a credit line can significantly affect your monthly payments and savings too.
It is always better to be prepared before negotiating with your lending agency. Hence be sure to know enough about prevailing rates and then arrive at a discounted deal.