In today's market, there are a wide variety of flexible mortgage products which you can choose from, each with their own particular features.
You might be comparing a standard variable rate loan to a home equity loan, noticing that the standard variable mortgage has a slightly lower interest rate, and thinking therefore that the latter might be the more attractive option for you.
Whilst this may be the case as it is initially cheaper, the trade-off is that the standard variable rate loan is less flexible.
For instance, if you obtain a standard variable mortgage, but plan to possibly move house in coming years and purchase a home elsewhere, you would have to apply for a new mortgage again on the new property when you move, and you will therefore re-incur application and financing costs, as well as mortgage stamp duty all over again.
Most home equity loans, however, are portable. They allow you to simply switch the security that your financier holds for that mortgage from your previous home to your new home.
It's also quite easy with a Home Equity Loan to switch from principal and interest, to interest only repayments. This may come in handy if you find yourself out of work for a spell, or you experience some other form of unexpected financial difficulty.
Unlike most variable rate mortgages, home equity loans usually allow you to link a debit card to the loan. Better yet, you could apply for a separate 55 day interest free credit card and setup a "sweep" facility with your bank. At the end of the 55 interest free period, the previous month's card balance is paid in full automatically by direct debiting from your home equity loan. This can save you on interest for the intervening 55 days.
Whilst the flexibility and advantages of a home equity loan are many, there are also pitfalls for the financially undisciplined, or those who do not keep a budget. Typically, a home equity loan has a credit limit set at 80% of the value of the security: your house. Because there is generally no mandatory requirement to pay off any of the principal, one can easily slip into the trap of borrowing against your equity to finance discretionary spending such as a new car, holiday, or household furniture or audio-visual equipment.
So whilst a home equity loan is a cheap form of credit with which to finance these things, if you use a home equity loan in this way you may never end up paying off and fully owning your own home. But if you set some goals, and set a corresponding budget, the flexibility and benefits of using this type of mortgage can be great.
You can find more information on the features of different home loan types here. The writer, Damien Dupont, hosts the FinanceTipster.com blog which receives contributions from many other finance writers. For the latest finance tips, visit: www.financetipster.com
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