Thursday, 2 May 2013

Deciding between a Line of Credit and a Home Equity Loan

If you are a homeowner who has been paying off a mortgage for a certain amount of time and is in need of some quick cash, then you should consider using your invested home equity. You can do a number of things in this case and it really depends on what your needs are, however the two most common options are home equity loans, or a equity lines of credit. Before you consider using your invested equity weight the options for a line of credit vs. a home equity loan.

  • Equity loans and lines of credit have typically shorter terms than your original mortgage. Most mortgages run for about 30 years while equity loans are usually 5-15 years.
  • A home equity loan is often called a term loan and is a one-time lump sum you pay off over a set amount of time. It is a fixed rate so you make the same payments each month. Once you get the money you won't be able to borrow further on the loan.
  • A line of credit is just like it sounds. It works similar to a credit card. You can borrow up to a certain amount for the life of the loan which is set by the lender.

What are the advantages for lines of credit?

Although most people are familiar with the use of credit cards, how does a home equity line of credit work and what are its advantages? For one it is tax deductible because it relates to your home investment. You can take out money as you need it just like a typical credit card. Every month you pay off the principal and your credit revolves to be used again and again. This is what makes home equity lines of credit a bit more flexible than a home equity loan.

It might not be possible however to find a home equity line of credit with fixed rates. Credit lines usually have variable interest rates that fluctuate over the life of the loan. Payments can vary depending on the interest rate and how much credit you use. Once the life span of a line of credit has expired you have to pay off the entire principal. Still, it might be possible to renew with your lender or extend the term.

How do you choose?

It's not always easy to know what the best option should be for your particular situation. It really comes down to whether you need immediate money for a certain purpose, or plan on needing money to help get through a longer period of time. Maybe your home was damaged by a storm and needs immediate repairs. You are expecting to owe $2,000 within a week and don't have any plans to borrow again. Then you might choose a lump sum home equity loan. However maybe you are trying to send a child to private school and want to have enough money to help pay for tuition over the next few years. A home equity line of credit can help you get through those financial hurdles. A credit line might cost less than a loan in the long run.

You can find online home equity line of credit and loan help by visiting They can set you up with a real estate agent in your part of the country for free by calling 1-800-987-1397