Home Equity Line Of Credit vs Home Equity Loan

Acting much like a second home mortgage (but often with lower interest rates) a home equity loan is a program which offers a homeowner up to 85% of their home’s current equity in the form of a large sum loan. Interest is accrued and a monthly payment structure is set up, just like a standard mortgage loan. Yet instead of a standard home loan, money from a home equity loan can in most instances be used to pay for anything: home remodeling, college tuition costs, medical bills, business expenses, a new car, family vacation ... In most programs, there are no restrictions. And to apply, homeowners must only submit to a credit check and pay for the bank or lending institution to perform a home appraisal. Other fees and requirements may apply, but are usually nominal.

A home equity line of credit (HELOC) is granted using the same percentage system as a home equity loan and requires the same documentation-credit check, home appraisal-yet a Home Equity Line Of Credit is issued in the form of a credit card or checkbook with a limit (much like a standard credit card account). While some lenders issue annual Home Equity Line Of Credit fees for having an account open, others simply charge as you spend the money, with accrued interest. Therefore, your monthly payments differ based on the amount you have spent. As you pay down the limit, more funds become available, and so on. And, just like the home equity loan, most home equity lines of credit allow borrowers to use the money for whatever they wish.

Pros and Cons

Home equity loans have been hailed as one of the most flexible and desirable lump sum loan programs, primarily because of the low interest rates and tax advantages. Yet they are perhaps the most advantageous to those who need a lot of money and fast-such as for a short-term, large-scale project or medical bills.

Home Equity Line Of Credits, on the other hand, are best utilized by people who might need a large amount of money over a span of time-such as college tuition or home remodeling projects that require long-term payments. Home Equity Line Of Credits act in much the same ways as credit cards-but with a few distinct advantages. First and foremost are the interest rates, which are often much, much lower than standard credit card fees and rates. Home equity line of credit rates begin at an interest rate that is less than prime, while credit card rates have been known to reach into the upper 20th percentile. That’s a big difference.

Perhaps this is why home equity loans and home equity lines of credit have become such popular forms of debt consolidation programs. Credit card debt can be paid off with the low interest rate from a home equity loan or home equity line of credit, and then wrapped up into their low interest monthly payment.

Lastly, a considerable advantage for both Home Equity Line Of Credits and home equity loans is that they can have tax advantages, including deductible interest. (Check with your tax accountant or CPA for more information.)

The downside to both loan programs is that they use your home as collateral, meaning that if you default on the loan for any reason, your home could be put at risk. Be sure that you’re financially able to at least make the minimum monthly payments before signing up for such a program-regardless of how good it might sound.

What is a home equity line of credit?

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer’s largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills and not for day-to-day expenses.

With a home equity line, you will be approved for a specific amount of credit--your credit limit, the maximum amount you may borrow at any one time under the plan. Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the home’s appraised value and subtracting from that the balance owed on the existing mortgage. For example: