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 refinance and get cash out. Another option would be to take out a 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: you’ll withdraw 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 lines of credit: To help you rebuild your available line of credit, your lender may require minimum monthly payments that include principal and interest. When you pay down additional principal each month, not only will you reduce your overall debt more quickly, you’ll save on the interest you pay over the life of the loan. Your lender may also offer you a Fixed-Rate Loan Option that allows you to convert all or just a portion of the outstanding variable-rate balance to a fixed rate. Bank of America HELOCs require Glossary Term: variable-rate monthly minimum payments that include principal and interest, as well as the choice to convert to a Fixed-Rate Loan Option.
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.