There are many options for home equity loans repayments. The option can range from paying the interest only to making extra payments to pay off the principal sooner than the agreed schedule.
Developing a plan on how and when to repay your loan is one of many essential steps to taking a home equity loan. This is to make sure that you can develop a repayment budget even before you apply for it. Using the budget you’ll know in advance which repayment plan is right for your financial situation.
Home Equity Loans Repayments
Home equity loans come in two forms: closed-end home equity loan and home equity lines of credit. If you borrow a closed-end home equity loan you’re required to make monthly repayments of principal and interest, such as you do with your first mortgage. Here both the date and the interest rates are fixed.
In a home equity line of credit the repayment plan is flexible. Some lenders allow you to repay the interest alone during the life of the loan. Using this arrangement, if you borrow $20,000 you’ll have to repay the amount when the loan term ends.
Other lenders set “minimum payments” that consist of the principal plus the interest, similar to that of credit cards’ payment method. Some other lenders offer regular principal repayment plan along with the interest payments.
With fixed rate second mortgage loan, you pay fixed amount monthly, during the term of the loan. But you can repay interest alone or the minimum allowable payment with home equity lines of credit.
Equity Loans Repayment Schedule
The right repayment plan is dependent on uses of the loan and your ability to repay the loan. You may apply this rule as a guideline: plan to repay no longer than you plan to enjoy the benefits of the loan.
1. Uses of the loan. What are you going to do with the loan? If you’re going to use the loan for debt consolidation plans to repay in less than 2 years. Here you may not enjoy the benefits of the loan directly. The sooner you pay off the loan the better as it’ll prevent you from falling into the next round of debt problems.
Borrowing for home remodeling, however, will involve a large sum of money. Depending on the size of the improvement, you may expect to enjoy the benefit at least in five years. In this loan usage you need to plan no more than 7 years.
2. Ability to repay the loan. The repayment schedule of a closed-end home equity loan is fixed and normally its monthly payment is higher than of lines of credit. But at the end of the loan term, if there are no nonpayment, you repay the entire principal and the interest.
In a home equity line of credit, if you repay the interest only during the term of the loan when the term ends you may have to pay the original amount you borrow. And if you’re unable to repay it, you could lose your home.
So, when it comes to borrow against your home equity make sure you have a plan on how to repay the loan. If you’re not strong at money management choose a fixed rate second mortgage loan. Even though the repayments’ amount of these equity loans is often steeper, it’s easier to manage.