Home Equity Loan Interest Rates: Variable Rate Vs. Fixed Rate

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new york city, New York, United States of America (Free-Press-Release.com) April 22, 2011 --

If you are a homeowner and need extra cash, you have many options available to you. If you have paid off a significant portion of your mortgage, you can opt for refinancing at a lower interest rate and receive the cash you need as a lump sum. A line of credit or home equity loan can also put some much needed extra money in your hands. These equity lines of credit have become very popular over the last few years. With a line of credit, you have access to your money via an open account whenever you need it for an emergency or have other expenses you want paid off. There are two different types of home equity loan interest rates; fixed and variable.

How a Home Equity Line of Credit Works

Think of a line of credit like a credit card cash advance. In order to open this type of line of credit, you must use the equity in your home as collateral. You will be provided with an ATM card, or debit card. Many times you will also be provided with a checkbook from the lender. If you need cash for car repairs, a new roof, or just want a vacation, you simply withdraw the funds from your line of credit. In most cases you are not limited to what you need to use the funds for; you can even use it to put a down payment on an investment property if you wish.

Any funds that you withdraw will have to be repaid. Your lender will send you a monthly statement with your due date and minimum payment to be made. The minimum payment will vary, because the amount that you withdraw will vary. It is similar to a credit card, but the interest rate is much less. Because of this, your monthly payments are lower and you can pay off the outstanding balance much faster.

Rates for a Home Equity Line of Credit

Your lender will give you either a fixed or variable rate if you opt for getting a line of credit. There are pros to both types. If you want an attractive introductory rate, or you don't plan on using a large portion of the funds, the variable rate is usually a good option.

Be aware though, that the variable rate will likely fluctuate up or down throughout the year. If the rate increases, it will also increase your monthly payments. If the rate increases dramatically, you could run into problems making your minimum payment.

If you plan on paying off other debts with your line of credit, a variable rate is probably not the best option for you. It could take years before it is fully paid off, and a rate increase could push your monthly payments even higher. You may lose your home via foreclosure if you are unable to meet your payment obligations. With a fixed rate, your rate will not increase and you know exactly what your monthly payments will be.

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