A Home Equity Loan or a Home Equity Line of Credit, Which One Is For You?

For many people, the equity, or value they have in their home, is the largest amount of available money that they have on hand. Unfortunately, when you need to borrow this money, it can quickly become confusing. Do you want a home equity loan or a home equity line of credit? While both of these are very similar, they can also be very different when it comes to the amount of interest you have to pay and the amount of time you have to pay the money back. Knowing a little bit more about each of these may help to make your decision a little easier.

A Home Equity Loan is a Second Mortgage

When you apply for a home equity loan, you often do so because you need a one time lump sum of money. Your lender will give you this in exchange for you agreeing to repay this money over a period of time. This time period can vary based on the terms of your contract, but can be as long as 30 years. 

Most home equity loans have a fixed interest rate, but some of the loans on the market may come with an introductory, or teaser, rate which will increase at a later date. If you choose to accept one of these, make sure that the loan has a lifetime cap on the interest rate that will not exceed a rate that you will be comfortable with.

A Home Equity Line of Credit Is More Like a Credit Card

A home equity line of credit, which is often referred to as a HELOC, acts as a revolving line of credit against the equity in your home. This means that you are able to access as much or as little money that you need at any given time, as long as you do not exceed the amount you have been approved for. Unlike your home equity line, this line of credit normally comes with a variable interest rate.

When you apply for a line of credit, you are normally given a credit card, or checks you can use to access your funds. With an equity line there may be two very distinct periods. These are:

  • The draw period - or the time that you are able to actively use your line of credit. During this time your minimum payment will usually be interest only. You can increase the amount you pay during this time to assist in repaying the principal.
  • The repayment period - this is the time that you will pay back the principal funds that you have borrowed. Your payments during your repayment period are usually much higher than they are during the draw period.

No matter which one you choose, you need to remember that your home serves as collateral for the funds you are receiving. To keep from putting your home at risk, you do not want to ever take more money than you actually need, or that you can afford to repay. Consider contacting a local bank, such as MCS Bank, to discuss your options and find the right solution for you.

About Me

rapid cash loans - the benefits and mistakes to avoid

Having kids is quite an expense! I love my kids dearly, but there are times that I struggle to come up with the money it requires to provide them with everything that they need. Thankfully, we have learned about loans that can be taken out quickly to pay for emergent situations. For example, my son broke his only pair of glasses at soccer practice and I didn't have the money to replace them. I went online, applied for a rapid loan and had the money in my account to pay to get his glasses ordered with expedited shipping. Learn how our family has responsibly taken advantage of rapid lending and what mistakes you should avoid when borrowing from online resources.