Mortgage loans come in different shapes and sizes to fit borrowers' needs. The 30-year mortgage is generally the most common, but other repayment terms include 10- and 15-year arrangements. Mortgages finance the purchase of a property, whereas lines of credit can be used for many different purchases. A line of credit can be established using the equity gained in your property; this is called a home equity line of credit.
A 10-year mortgage is a conventional mortgage loan with a repayment term of 10 years. In comparison to mortgages with longer terms, the 10-year mortgage generally provides lower interest rates. Saving money on interest appeals to many people. The monthly payment amount will be much more than a mortgage with a shorter term; it also means equity builds quickly. The decision to use this mortgage should be made after careful planning and being prepared for future changes to your financial situation.
Home Equity Line of Credit
As you pay down the principal balance in your property and the property value appreciates over time, you build equity. This is simply the value of the property minus what is owed. For example, if you purchased your home for $200,000 with a $20,000 down payment, you start out with $20,000 in equity. Over the next five years you pay $30,000 toward your principal balance and the property appreciates in value by $5,000. Now, you have $55,000 in built-up equity. Many lenders offer home equity lines of credit, commonly known as HELOCs. This money can be used for a variety of purposes, such as home improvements or college tuition.
A HELOC is structured as a type of revolving credit account. The lender will set the maximum amount you can borrow -- based on the equity value -- and a term. The term will consist of a borrowing period and a repayment period. During the borrowing period, you can use the money at your leisure and make interest-only payments. Once this term is up, the repayment period beings and you will start to repay the borrowed amount plus interest. Usually the total life of a HELOC is 25 years with the borrowing period for the first five to 10 years.
The home equity loan is somewhat similar to a HELOC, only it pays out a lump sum which you begin to repay immediately. Home equity loans are sometimes called second mortgages, because they function in a similar manner as a regular mortgage. HELOCs tend to carry lower interest rates than mortgage loans, but the rates are adjustable and could increase at any time.