Ok, you have now finally decided to go in for a loan with collateral against your equity in your home. Whatever, may be the reason for you to take up this loan, you need to ask one basic question before taking up such loan that for you what kind of equity home loan is correct; non-fixed rate equity home loan or fixed rate equity home loan? Both the types of loan mentioned have different interest rates and payment structures. Therefore, to further improve our understanding, let's look in a bit more detail at each of the available types.
Equity home loan of non-fixed rate type is commonly named as equity home line of credit. Such type of loans gives the person who has taken the loan the ability to borrow money equivalent to the equity that the person has in his/her house and that equity is used as a collateral or security. However, instead of providing the full amount at the outset, the person can periodically withdraw small sum of money that total's up to his equity value or the loan amount. For example, if a person has taken a loan of million, he or she can withdraw million annually i.e. in installments. The borrower, in this get's all the money; however, in installments though.
In equity home line of credit, interest rates are flexible and it can be adjusted as per the borrower's preference. The borrower can decide the factors in an equity home loan like the loan amount, minimum monthly installment required, repayment rate, etc. This kind of loan is greatly flexible; however, it can be very risky too. The constantly changing interest rates cannot be predicted and it may sometime result in ballooning up your interest payment. This loan is useful at the time of declining interest rates as your interest payment will keep on declining; however, in case of rising interest rate this type of borrowing can be very dangerous.
Fixed rate equity home loan allows the borrower to get money equivalent to his/her value of the home. The home of the person who has taken the loan is used as security. Depending on loan rates and state laws, a borrower can have loan amount equivalent or less than 125% of value of his/her equity in the house.
In equity home loan of fixed rate, the person gets the entire loan amount in one time. Next, the person is required to pay as per fixed rate of repayment based on fixed term of full loan repayment. This kind of loan suits people who have the ability to plan their repayments and can follow the payment term. People or borrowers who need big amount of money instantly should look for a equity home loan of fixed rate.
The important things that you should keep in mind while deciding between a fixed-rate or non-fixed rate equity home loan is what amount of money do you require at a particular time, for what you need this money, and most important of all, your ability to pay back the loan amount. Giving your house as a debt security or collateral is a decision that is needed to be carefully studied and thought over.