Home equity line of credit vs. home equity loan: which is better?

by James Hendrickson on May 12, 2017 · 0 comments

home-1682300_640There are 2 kinds of home equity loans: closed-end loans and lines of credit. Both are also known as second mortgages because your property secures them like with your first mortgage. However, these loans are for a shorter term than mortgages: the latter run for up to 30 years while equity loans have 5-15 year terms.

Home equity loan

This can also be called a term loan. A home equity loan is a one-time lump sum, which is repaid over a certain period with a fixed rate of interest. Once you get the money, you cannot borrow further until you pay it off.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is just the same as credit card: you can take up to a certain limit for the life of the loan, which the lender sets. During this time, you can withdraw money from your account whenever you need it.

Once you repay the principal, the credit revolves, which means that you can use your HELOC again. For instance, if your line of credit is up to 10,000 dollars and you borrow 5,000 dollars then repay 3,000 towards the principal, your new available credit will be 8,000 dollars. A home equity LOC gives you more flexibility than a loan.

What are the home equity line of credit rates in my state? You should know that the interest rate on a line of credit varies over the life of a loan. Payments also vary depending on how much credit you have used and your rate of interest. Once the span of your LOC has expired, you must pay it off.

A LOC is accessed using a specially issued credit card or check. A lender will ask you to take an advance when to set up the HELOC, withdraw a minimum amount each time you need cash, and keep a small amount withstanding.

Which one should you choose?

The answer to this question is not straightforward. However, in some cases, the answer is obvious. For instance, if you need seven thousand dollars to pay for school tuition next month and two thousand to fix a leaky roof in a week’s time, a home equity loan will suit your purposes better.

However, if you need cash over a spread out period, a line of credit is better for your needs because it affords you flexibility to borrow just what you require when you need it. If you can borrow small amounts of money and repay the principal quickly, a LOC will be much cheaper than a loan.

Credit card debt consolidation

If you have a substantial credit card debt, borrowing a lump sum is the best choice. This kind of debt consolidation is one of the main reasons why people take out home equity loans, because they pay in a lump sum.

To determine the best loan for your needs, ask yourself these questions:

         How long will it take to pay it off?

         When do I need the cash?

         How much can you afford in terms of monthly payments?

         For how long do I need the money?

You should also ask your lender the following questions to ensure that you are on the same page:

         Can I renew my LOC when the life of my loan expires?

         How long is the term of a closed-end loan?

         How big a line of credit do I qualify for?

         Under which circumstances would you reduce, demand full payment, or reduce my loan?

         Am I allowed to lease my house during the duration of the loan?

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