Home Equity Loans and Home Equity Lines Credit

Home Equity Loans

Understanding the differences between home equity loans and home equity lines credit

The home equity line of credit and the home equity loan have become popular options to finance unexpected or large expenses. The interest rates on home equity loans and credit cards are typically lower than those on credit cards. They also allow you to borrow against your home’s equity to get access to funds.

The interest you pay on the loan could be exempt from tax. Ask your tax advisor if this is applicable to you.

What is a home equity credit line?

The home equity line-of credit (or HELOC) functions as a revolving credit line. Instead of receiving a lump sum, you have the option to borrow as much or little as you need at any time, up to your credit limit. Once you are approved for a line, you will receive checks and a credit card that you can use to make a withdrawal against the line.

The HELOC can be split into two periods.

  • The draw period is the time during which you can use your credit line actively
  • Repayment period is the time you have to repay the borrowed amount.

Your minimum monthly payment will usually be the interest for the draw period. During the repayment period, you will be responsible for repaying the principal. This could lead to a higher monthly or balloon payment at maturity. You can borrow again until the draw ends if you have not paid the principal.

A HELOC’s flexibility is one of its greatest benefits. A HELOC is similar to a home equity loan. It can be used for any purpose you wish. It’s best suited for ongoing, long-term expenses such as home renovations, medical bills, or college tuition. The amount that you are approved for depends on the appraised value of your home, less any outstanding mortgages. The variable interest rate on a HELOC is usually based upon fluctuations in an index such as the prime rate.

What is a home equity mortgage?

A home equity loan, also known as a second mortgage or a home equity loan, allows you to access a lump sum of money and is payable over a period of 10 to 30 year. An appraisal is usually required for a HELOC application to determine the market value your home.

Home equity loans are best for large, one-time costs. They can be used to help you with short-term expenses such as home repairs or buying a car. This loan usually has a fixed interest rate.

Learn the terms of the home equity line of credit or loan for home equity

You are using your home as collateral when you take out a home equity loan. Make sure you fully understand the terms and that the amount borrowed is within your financial means.

A fixed-rate home equity loan will require you to make regular payments. You will know exactly how much you will pay each month over the term of the loan. A HELOC allows you to make interest-only payment during the draw period.

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