Home equity loan or home equity line of credit?

Here are the basics of home equity loans and home equity lines of credit, the differences between these products, and some information to help you decide which is right for you.

 

A home equity loan and a home equity line of credit, or HELOC, are two ways you can borrow money against your home equity, or the value of your home minus what you owe on any mortgage(s) you have. Home equity loans and home equity lines of credit are also called "second mortgages" because, like your first mortgage, your home is the collateral, or security for the loan.

Home equity loans and home equity lines of credit may be able to help you with:

· Debt consolidation
· Home Improvement
· Special purchases
· Unexpected bills

Why Borrow Against Your Home Equity?

Borrowing money against your home equity has some advantages over other ways of borrowing money:

· Your interest rate may be lower.
· Your interest rate may be fixed instead of variable.
· You may be able to borrow more money with a home equity loan or home equity line of credit than with other ways of borrowing money.
· You may be able to deduct the interest from your taxes.  Consult your tax advisor for details.
· If you want to consolidate your debt, you'll have only one payment every month. Also, you may be able to lower your interest.

What's the Difference between a Home Equity Loan and a Home Equity Line of Credit?

This chart shows the basic differences between a home equity loan and a home equity line of credit.

 

	Home Equity Loan	Home Equity Line of Credit
Funds	You get the entire amount you borrow at one time.	You can borrow different amounts at different times up to the total amount of your line of credit by writing checks, or accessing the line other ways, as you continue to make at least the minimum payments.
Term	The term of the loan is fixed for a certain number of months.	Your line of credit will most likely remain open until you pay it off or close it.
Monthly Payment	Your monthly payment stays the same for the entire term of the loan.	You have a minimum monthly payment that may be as low as the interest due. Your monthly payment may change with how much you borrow and how much you pay off.
Interest Rate	Your interest rate stays the same for the entire term of the loan.	Your interest rate stays the same for as long as your line of credit is open; however, each HELOC may be different.

 

How Do I Decide?

Here are some questions to ask yourself to help you decide if a home equity loan or a home equity line of credit is right for you:

· Do I want to borrow one amount at one time or borrow different amounts at different times?
· Am I most comfortable with a monthly payment that stays the same from month to month or a balance that changes every month?
· What will I be using the money I borrow for?

How do I get started?

Applying for a home equity loan or home equity line of credit is a lot like applying for your original mortgage.

1. Gather any necessary paperwork, such as:
· Personal ID
· Paperwork for any current mortgages 
· Pay stubs for the last month
· Tax returns for the last two (2) years
· Copy of your homeowners' insurance policy
· Copy of title insurance paperwork
· Bank account statements
· Investment account statements
· IRA, 401k, or 403b statements
· Any other paperwork your lender asks for

2. Get a copy of your credit report and credit score.

3. Talk to several lenders and compare their interest rates, fees, terms, and monthly payments.

 

 

These are general recommendations not applicable to all financial situations. Every financial situation is unique. Further, the suggestions and recommendations contained within the content provided are not an assurance of any future result. Be sure to discuss your specific financial circumstances with a legal or financial expert before you take action.