Understanding the difference between home Equity Lines of Credit and Home Equity Loans
These loans and home equity lines of credit have become more popular as a way to finance unexpected costs or large amounts. Both interest rates are lower than credit card ones and you can borrow against the equity of your home to get funds.
You may also be able to deduct the interest on your loan. Discuss your situation with your tax advisor.
What is a Home Equity Line of Credit?
A home equity loan of credit (or HELOC), functions in the same way as a revolving line. You don’t get a lump sum. Instead, you can borrow as much as you need at anytime – up until your maximum credit limit. You’ll be issued checks or a creditcard when your application is approved for a loan.
A HELOC could be divided into two periods.
- The draw period, which is the maximum time you can use the credit line.
- Repayment is when you repay the borrowed amount.
Most cases, the minimum monthly payments you make will only cover the interest over the draw period. The principal will have to be repaid during the repayment period. This could result either in a higher monthly repayment or a balloon payment at the end of the term. If you make principal payments during the draw period it is available to you for borrowing again until the end of the draw period.
Flexibility is one of the greatest advantages of a HELOC. HELOCs can be used in the same way as a home equity loans. The HELOC is best for long-term, ongoing expenses, such as home renovations or medical bills. The amount you may be approved for will depend on how much your home is worth, and what your outstanding first mortgage debt is. A HELOC typically has a variable rate of interest that is based on fluctuations in an index, such the prime rate.
What is a Home Equity Loan?
A home equity loan is also known as a 2nd mortgage. It allows you to borrow a lump amount of money, which you will repay over 10 to 25 years. A home equity loan is similar to a HELOC. An appraisal is often required in order to establish the market value of your property.
Home equity loans can be a good option for larger, one-time expenditures. These loans typically have a fixed rate of interest.
Know the terms of the home-equity loan or line credit
Home equity loans or lines of credit are secured by your home. You should read the terms and limit your borrowing to a level that is affordable.
Fixed-rate home equity loans come with a fixed monthly payment schedule. The exact amount of your monthly payment over the duration of your loan will be known to you. You can make interest-only payments with a HELOC during your draw period.