Home Equity Loans Versus
Home Equity Line Of Credit
Typically, an investment in a home is the largest single investment a person will ever make. Presuming the home was purchased under the right conditions and the right mortgage loan package, many homeowners have spent many years and even decades building a large equity. For many reasons, there are times that monetary needs arise that could require drawing against that equity build-up. Perhaps to pay for a kid's college expenses, make expensive home repairs, take a much needed vacation or to payoff high interest bearing debt among an infinite number of other reasons. Whatever the reasons for applying for an home equity loan or line of credit, the reasons should be prudent. You do not want to foolishly depress your nest egg.
Difference Between An Equity Loan &
Equity Line of Credit.
As with any type of financial product there are both benefits and risks associated with these types of borrowing methods. It is important that the borrower first understand the differences between these two borrowing methods. The amount borrowed creates the major difference. In both cases, the home typically secures the loan. There are income tax advantages with both types of credit approaches. Talk to your tax adviser.
A Home Equity Loan is for a predetermined, set amount of money with a preset loan payment amortization period. Essentially it is a second mortgage home loan that is separate and subordinated to the first mortgage lender. This loan option is typically used for larger needs when the required amount is known upfront. Reasons could be to add a swimming pool, a new roof, a home remodel, to consolidate other debt, buy a new car, payoff large medical bills or college tuition costs.
A Home Equity Line of Credit is a revolving line of credit to a set maximum limit based upon ongoing needs. The maximum allowable amount of the credit is determined by the lender based upon a percentage of the home's equity and the borrowers credit worthiness. The borrower may set a personal limit within the maximum allowable loan amount and tap into that amount when emergency needs arise or when upfront costs cannot be accurately defined for specific projects.
The Advantages.
Among the advantages of both equity loans and equity lines of credit is the low interest rate these types of credit products typically carry. Both types could provide income tax advantages as well. Talk to your tax adviser for details. Since they are secured by the equity in your home equity loans and line of credit usually feature excellent interest rates for homeowners with good credit.
The interest rates on home equity lines of credit are generally lower than home equity loans and equity loans also generally require other associated costs such as closing costs, title searches, and mortgage insurance.
When Choosing An Equity Lender.
Remember that you are risking your home's equity. So first, be sure that the resulting funds from a bank or mortgage lender are prudently necessary. The home lending industry is full of "predatory lenders" that use unethical loan practices. Do your homework, prepare a list of questions and apply with multiple equity lenders and compare the packages with a close eye on the fine print. It's always wise to seek an independent, professional opinion from an accountant or attorney, or both. Read more about finding an honest lender.
An Extensive List of Equity Lenders.
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