Home Equity Loans vs. Home Equity Lines of Credit

If you own a home, you can borrow against the value of your house through either a home equity loan or a home equity line of credit. The value of your house is its appraised market value minus a mortgage balance. Both of these loans are thought of as second mortgages. To find out which loan is best for you, let me compare the two.

A home equity line of credit gives you a maximum amount you can borrow. From there you can take out as much as you need as long as it is under the maximum limit. This will make your monthly payments smaller if you need less. The interest rates and payments vary depending on how much you’ve borrowed. You can also choose to pay the whole thing off instead of just paying the monthly fee. It provides some flexibility for the investor.

A home equity loan gives less flexibility, but it may work better if you need a large sum of money. The home equity loan gives you a lump sum with a fixed interest rate. You pay it back with interest over the course of several months. With both of these loans, the amounts are determined by your credit rating, current debt, and such. If you’re a savvy investor, you may be able to put your home’s value to work for you.

Both of these loans generally give lower interest rates then credit cards or regular loans. The interest is often tax deductable as well. The loans can be looked at as a reward for being a home owner and having good credit. They can be used to pay off unexpected expenses, to help a college fund, to remodel your home, for help starting a business, or whatever else you may need.

Both of these loans, being second mortgages, have higher interest rates then first mortgages. If you have no mortgages on your house, then look into that first. A mortgage is a similar idea to a home equity loan in that it uses home value as collateral for a loan. The difference is that a mortgage can be used for any type of property. If you have no mortgage and you need money, then a mortgage loan is what you should look into. However, if you are most people, then you probably have already taken out a mortgage to buy your house. In that case home equity loans are for you only if you have paid back a considerable amount of your house’s mortgage.

In the case of Home equity loans, home equity credit lines, and mortgages, remember that your house is used as collateral. If you borrow more then you can pay back, you risk losing your house. This is, needless to say, bad for everyone. The bank doesn’t want to have to sell your house, the bank wants money. You probably don’t want to move either. If you can’t pay, however, then you will have to move because the bank will take possession of your property.