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 loan or line of credit. Here are some of the key differences between a Glossary Term: cash-out refinance and a home equity loan or a home equity line of credit (HELOC):
Home equity loan or 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 loan: you receive a lump sum when your loan closes.
Home equity line of credit: you’ll receive access to a line of credit that you can draw from as needed, up to your credit limit. The draw period is usually 10 years. Following the draw period, a repayment period begins, usually 15 years. During the repayment period, you will repay the remaining principal and interest and you may no longer draw funds from your line of credit.
Home equity loans: are Glossary Term: fixed-rate loans. Throughout the life of the loan, you’re protected from payment fluctuations as the interest rate remains fixed. Rates for home equity loans can often be higher than a cash-out refinance or home equity line of credit.
Home equity lines of credit: usually have a lower interest rate than a home equity loans or cash-out refinances. The 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 loans and 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, home equity loans, and home equity lines of creditFootnote 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.