Home equity loan/LOC....

[Anonymous]

Can someone who knows summarize the positives/negatives of a home equity loan or home equity line of credit.  Is it a good option to pay off credit card debt?  Also, since it is a 'secured' loan does your credit score have as much of a bearing on your rate or is it a standard rate given to all?  Thanks for any input

[Lel]

In a nutshell:

Home equity loan:

• Has a fixed loan amount and a fixed interest rate
• Typically has a higher interest rate than a HELOC - sometimes significantly higher
• Is always scored and classified as an installment loan
• Is often fully amortized over the life of the loan - but look out for the "30 due in 15" variety, for which payments are amortized over 30 years but a balloon payment for the full remaining principal is due after 15 years

Home equity line of credit:

• Has a variable interest rate, tied to the prime rate.  A HELOC opened now will definitely see an increase in interest rate in the future when the Fed starts tightening (though no one knows when that will be - maybe not until next year).
• Can be tapped for needed funds during the "draw period", which may last for 10-15 years
• Often has different options for payment - for example, during the draw period you may only be required to pay interest.
• Watch out for the payment shock if you only pay interest during the draw period - for the remainder of the loan (the payback period), you will have to make payments to pay off the principal in full, which could lead to a dramatic increase in monthly payment.
• May be scored as installment or revolving debt, depending on the score model being used and the credit limit of the HELOC.  So if you have a maxed-out HELOC that is being treated as revolving (i.e. credit-card-like debt), it can have a negative impact on your scores.

Credit score does matter regardless of which product you choose.  A lower credit score usually translates into a higher interest rate.

[MarineVietVet]

The only thing I would add to Lel's excellent post is the possible future impact of transferring unsecured debt to secured debt. A great amount of self-discipline is needed to make sure the balances on the paid off credit cards are not run back up again. Then you have the situation of having the home equity debt and the CC debt.

Just something to think about.

From a BK years ago to:
EX - 9/09 pulled by lender 802
EQ - 7/06-663, 3/10-800
TU - 8/10-772
You can do the same thing with hard work

[Lel]

+1 to marinevietvet's comment.  Transferring CC debt to a HELOC is attractive because interest rates are so much better, but the consequences are worse if you default.  If you default on a CC balance, your card might be closed and the account sent to collections.  If you default on a HELOC, the lender can foreclose.