The number of years it will take to pay off a loan. The loan term is used to determine the payment amount, repayment schedule and total interest paid over the life of the loan.
If you’re interested in borrowing against your home’s available equity to pay for other expenses, you have choices. One option would be to Glossary Term: refinance and get cash out. Another option would be to take out a Glossary Term: home equity line of credit. Here are some of the key differences between a Glossary Term: cash-out refinance and a home equity line of credit (HELOC):
Home equity line of credit: is usually taken out in addition to your existing first mortgage; rather than replacing it, it will have its own term and repayment schedule, separate from your first mortgage, and is considered a second mortgage. However, if your house is completely paid for and you have no mortgage, some lenders allow you to open a home equity line of credit in first lien position, meaning the home equity line will be your first mortgage.
Home equity line of credit (HELOC): you’ll withdraw from your available line of credit as needed, and make payments that include principal and interest, during your draw period—typically 10 years. After the draw period ends and the repayment period begins, you’re no longer able to withdraw your funds and you continue repayment. You have 20 years to repay the outstanding balance.
Home equity line of credit (HELOC): interest rate is Glossary Term: variable and changes with an Glossary Term: index (typically The Wall Street Journal Prime Rate). Your interest rate will vary with changes in the index (meaning if the index increases or decreases, your rate will increase or decrease accordingly). Your lender may also offer you a fixed-rate loan option. Bank of America home equity lines of credit include this fixed-rate conversion option. This would allow you to convert all or just a portion of the outstanding variable rate balance to a fixed-rate loan.
Home equity lines of credit: usually have no, or relatively small, closing costs.
If you think that borrowing from your available home equity could be a good financial option for you, talk with your lender about cash-out refinancing and home equity lines of credit.Footnote 1 Based on your personal situation and financial needs, your lender can provide the information you need to help you choose the best option for your situation.