Home Equity Loan & Line Of Credit Differentiated

A home equity loan and a line of credit let you borrow money with the use of your home as collateral. This might mean that if you’ll not be able to pay the money back, the lender may sell your home to get back the money you borrowed. These two are both usually called second mortgages. The reason to consider a second mortgage differs; some might include bill consolidation, college tuition, health costs and home repairs. When it comes to loans, these 2 kinds are popular. Before you proceed on a second mortgage though, you should be able to tell apart between a home equity loan and a line of credit.

A home equity loan is structured similarly to your first loan. To borrow using this type of loan, you make a one-time choice on the amount you’ll borrow, close the loan and receive a check for the chosen amount. Your payments will be structured over a period of years. Upon completion of the payments, your home equity loan will be absolutely paid. But, if you later decide that you want to borrow extra funds, you have to arrange for additional loan with additional costs of closing. This kind of loan carries a fixed rate that does not go up and provides a straightforward arrangement for repaying the cash back.

On the other hand, a line of credit allows you to borrow cash again and again. It’s simply like a credit card but the interest is tax deductible. You may also be able to close on a line of credit once. However, if you decide after several months to withdraw extra cash, you have to do so up to the loan value. For instance, if you close for $60,000 and pay back over a time $13,000 for the principal amount, the $13,000 might be withdrawn anytime. You have to continue making payments to what you owe just like a home equity loan. Nevertheless, the full loan amount is always available to be drawn so long as the amount that you owe and the amount you borrow do not exceed the full amount of the original line of credit.

A home equity loan payment is the same every month while a line of credit could change and are primarily based on the rate of interest, the borrowed amount and if the loan is in a draw period of repayment period. Bear in mind that you can only borrow up to the amount of the equity of your home, therefore if you owe much or less than what your house is worth, you’ll not be able to acquire a home equity loan or line of credit. The main advantage of borrowing against the equity of your home is that the interest you’ll pay may be tax deductible. However, don’t forget that if you can not pay the loan, you’ll be forced to sell your property.

Before you decide between these 2 kinds of loans, you should consult your loan officer or a financial planner to determine whether or not a home equity loan or a line of credit is the correct one for you.

Posted by Supriyatna