Home Equity Loan Vs. Home Equity Line of Credit

It’s time.  The bathroom with wallpaper that pays tribute to Ausitn Powers has overstayed it’s welcome.  Your long overdue to make some much needed improvements and upgrades.  But where does the money come from?   You could charge it on the credit card, but the 14.99% interest rate isn’t all that attractive.  Realizing you have some equity in your home, you explore your options.

If you are looking to borrow funds from your home’s value, you have two options. You can either choose a home equity loan or a home equity line of credit. Here is a comparison of the two.

Home Equity Loan

A home equity loan is in essence a second mortgage, and works much like your first mortgage.

  • You will decide on the amount you need and when it is approved, that is the sum you will borrow.
  • You then close on the loan, just as you did on your first mortgage.
  • You will now receive from the lender a check for the full amount of the loan.
  • Just as your first mortgage, you will now make set monthly payments on the loan.
  • The loan has a set term and you will make payments each month until the loan has been paid off in full.
  • Home equity loans most often carry a fixed interest rate.
  • After you have taken out the loan, if you decide later on you need more money, you must apply for a new loan.

Home Equity Line Of Credit

A home equity line of credit is a type of loan you open up with a bank or other lender and you can withdraw money from the account as you need it.

  • In essence a home equity line of credit works similar to a credit card in that you use it when you need it. The only difference is that the interest on the line of credit is tax deductible.
  • Whenever you need additional funds you can take them, up to the amount you have been approved for. You do not need to apply and close on a new loan each time you need money.
  • Payment plans on home equity lines of credit are usually flexible and very often allow interest only payments for several years, making them easier to handle.

Which loan should you choose?

Really that is based on your particular situation. There are some things to keep in mind when you are trying to make a decision. First, know that the interest from either loan is currently tax deductible and that both types of loans will use your home for collateral. An assessment will be done in the approval process to determine how much you can borrow.

If you are looking for funds for a specific amount, like to pay off a medical debt, your best bet may be to go with a home equity loan. If however, you are taking out the money to do a remodel to your kitchen a home equity line of credit may be a wiser choice because you never know what additional expenses may come to light. Additionally, if you are the type of person that has trouble not spending money that is available to them, it may be best to choose the home equity loan so that your spending does not go out of control.

A final thing to keep in mind is that you should never borrow more than you can realistically pay back. Remember that your home could be at risk if you default on either of these loans.  Hope that helps!

Creative Commons License photo credit: beedubz

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