iQuanti: A closed-end home equity loan can be a great choice for your finances depending on your circumstances. It can be a very attractive option if you have an opportunity to take advantage of low home equity loan rates available from Discover and other competitive lenders.
That said, before making any major financial decisions, especially any kind of home equity loan that uses your home as collateral, it’s always best to understand your options and consult with a licensed professional.
What is a closed-end home equity loan?
A closed-end loan is a loan where the lender agrees to loan a fixed amount to the borrower. The borrower then repays the amount over a set period of time and at an agreed upon interest rate. The borrower cannot re-borrow any portion that has been paid back.
In other words, closed-end home equity loans give you a lump sum upfront, and you make regular monthly payments until the loan is re-paid in full with interest. Closed-end home equity loans typically have repayment periods of 10-30 years and use your home as collateral for the debt. They are an alternative to Home Equity Line Of Credit (HELOC) loans, which extend you a line of credit that you can borrow from as-needed and roll over the balance month-to-month.
What do you want to use the money for?
A closed-end home equity loan is going to be useful for a large, predictable one-time expense. Examples might include a major renovation for your home, a new car, or consolidating other debts.
Major renovation
Let’s say you take out a closed-end home equity loan to cover the cost of a new roof for your home, which costs $50,000. Although you’ll pay back the $50,000 principal plus interest over time, the fact that your home has a new roof could increase its value to the point where it will offset the cost of your loan and the interest it incurs. In this scenario, the interest may also be tax deductible since you used the home equity loan to improve your home. Consult your tax advisor for your particular tax implications.
Consolidating debts
Many people use closed-end home equity loans to consolidate debt. For example, if you have car payments and credit card debt, you could take out a closed-end home equity loan to immediately pay off those debts, and then pay off the home equity loan at a lower interest rate and at a lower monthly payment. Home equity loans tend to have lower interest rates because they are secured loans which use your home as collateral.
Refinancing your mortgage
Also known as taking out a second mortgage, refinancing your mortgage is essentially where you take out a new mortgage to pay off your current one, and the new mortgage has a lower interest rate. There are more factors than lowering your interest or monthly payments that come into play when you consider whether or not to refinance your mortgage, such as fees, how close is the original mortgage to being paid off, when you plan to sell, etc.
Using a closed-end home equity loan to refinance is usually worth considering when you still have a good amount of your existing mortgage to pay off, and you have no plans of selling your home in the near future.
The bottom line
Closed-end home equity loans are generally best used to take care of large, one-time expenses or to refinance debt at a more advantageous interest rate. You always know what your payments will be in advance, and with low interest rates and a long term, your monthly payments can be less than they would be when you take out shorter term loans.
Source:https://www.newswire.com/news/is-a-closed-end-home-equity-loan-the-right-choice-for-your-finances-21587279
