Loans
There are many kinds of loans from car loans, to mortgages, payday loans, personal loans, credit cards, and dozens of others in between. In the end there are just two kinds of loans: secured loans, and unsecured loans. A secured loan is "secured" by collateral. In other words, if someone doesn't pay, then the lender is allowed to legally take something in exchange for non-payment. An unsecured loan has no collateral. The lender's only recourse in the event of non-payment is continued attempts at collection. Secured loans include mortgages, car loans, and home equity loans. Unsecured loans include student loans, credit cards, and personal loans. Generally speaking, secured loans have lower rates than non-secured loans.
Home Equity LIne of Credit or HOme Equity Loan
There is some confusion regaring the difference between a Home Equtiy Line and a Home Equity Loan. A home equity line of credit or HELOC is a "line of credit." It seems obvious, but if you stop and think it through it can really help. Your credit card is also a credit line. Just like your credit card, your HELOC has a credit limit. That credit limit is the maximum amount of credit that you can get under your HELOC. So, if you apply for a $25,000 Home Equity Line of Credit you are applying for what is essentially a credit card with a $25,000 limit except in if you don't pay this one back, they'll take your house. (These days some HELOCs actually come with a Credit Card!) This means that you do not have to take the full $25,000 right away. In fact, you never have to take the whole $25,000. If you get a $25,000 HELOC to remodel your kitchen and it only costs $18,000 you can take just $18,000. You only pay interest on the money that you have actually taken, so in this case you would be paying interest on $18,000 only.
A Home Equity Loan on the other hand is much more like your mortgage. A home equity loan is full amortized. That means that when you get a $25,000 Home Equity Loan, they give you a check for $25,000 and you start paying interest on the whole $25,000 right away. Also, unlike a home equity line of credit this is a one time funding. You can't go back and take money out again once you've paid it off. So, if you get your $25,000 and you make $10,000 worth of payments, you can't go get $10,000 under the same loan. (You would have to re-apply for something else.) So why would anyone ever do a home equity loan? The main reason is that home equity loans usually have a fixed interest rate whereas a HELOC usually has an adjustable rate. This makes a very big difference when interest rates are rising. With a home equity loan you know what your payment will be until the loan is paid off. With a HELOC, you are taking a chance on interest rates.
So which is best for you? It depends on what you are going to do with the money. If you need a one time lump sum of cash and then just want to pay it off, then the home equity loan is the way to go. If you might need some money now, and might need some moeny later, then the HELOC is the way to go. Just keep in mind with an adjustable rate to not get in over your head. Make sure you can COMFORTABLY make the payments now because they might be higher in the near future. If you can barely make the payments now, then your HELOC amount is too high and you can get into big trouble if rates rise.
Credit Report and Credit Score
Your credit report and credit score go hand in hand. Your credit report is the file that is kept about your credit history by one of three major credit bureaus. Your credit score is a computerized number generated from your credit report. The purpose of a credit score is two-fold. One, is to allow a trained monkey to be able to approve credit for your without actually having to read and understand your credit report. Two, is to allow loans to be sold to investors by standardizing the risk the loans represent via the credit score number. Understanding your credit report and credit score are very important to getting the best value for your finances.
Read all about Your Credit Report here.
Read all about Your Credit Score here.
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Should I Pay Off My Mortgage
Answer to one of the frequently asked questions of the Finance Gourmet in his life as a financial planner. Click here to see Should I Pay Off My Mortgage
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