3 Reasons to Get a Fixed Home Equity Loan

There are two primary options for a home equity loan: a fixed home equity loan and a home equity line of credit. A fixed loan is like a traditional installment loan with a set interest rate and a predictable monthly payment. A revolving home equity line of credit is like a credit card; it allows you the ability to choose when to spend money and when to pay down the balance. While the flexibility of a home equity line of credit may appeal to you, you will have more security with a fixed home equity loan.

#1 Gain Loan Predictability

The main source of stability in a fixed loan comes from its predictability over time. When you take out a fixed installment loan, you sign a contract agreeing to exact interest terms and exact monthly payments for the entire life of the loan. Once you make your last installment, the loan is paid off, and the debt is closed satisfactorily. By knowing your monthly payment and interest rate, you will know the exact cost of any purchase you make with your home equity loan. You will also know when and how you are expected to pay off the purchase. Individuals who elect revolving lines typically have intentions of paying down the balance on time. However, the added flexibility of revolving lines often leads to large balances and, in turn, high interest rates. 

#2 Secure Foreclosure Protection

Most high-income households do not fear foreclosure. If you have a high income and an emergency savings account, you do not likely fear foreclosure either. However, once you start tapping into your home equity, you are losing a degree of the security you have provided for yourself. It is better to do this in exchange for a low risk loan. Fixed loans are lower risk because you can more easily plan for them. You will additionally be assured against high rate adjustments. Variable-rate, revolving loans do not offer this same security. If you default on your home equity loan, do not be fooled into thinking you cannot lose your home. Your home equity lender can purchase your primary mortgage even if it is in good standing. Then, the lender can foreclose on the mortgage.

#3 Avoid Compounding Interest

Revolving credit lines use a compounding interest structure to greatly increase the rate interest accrues. Any amount remaining on your revolving line balance at the end of the month, even if it is interest accrued from your purchases, will be compounded. While you only have to pay a minimum balance each month, you will find it best to continually pay down your balance to avoid this penalty. A fixed home equity loan does not charge interest upon interest. You will have an interest rate, which then translates into an APR based on how often the rate compounds in a year. You can determine your entire interest cost and loan cost for a year up front, allowing you to appropriately budget your money and avoid extra expenses involved with revolving credit lines.