Home Equity Loan…Or Line?
Your home represents your most valuable asset, and a usually sound investment. As you pay on your mortgage, and as the value of your home increases, you build equity, or ownership, in your home. And, when you need money to pay off debts or improve your home, that equity can help you by providing capital in the form of a loan against your home’s accrued value. When it comes to using the equity in your home for the extra cash you need, that equity usually comes to you in one of two forms:
1. Home equity loan
2. Home equity line of credit
While both essentially represent a loan, the way you get the money differs. Deciding whether to apply for a home equity loan or a home equity line of credit depends a great deal on what you want to do with the money you get.
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Home equity loan
A home equity is a lot like any regular loan. You borrow a specific amount of money from the lender, agreeing to pay it back over a certain period of time and at a certain rate of interest. The interest rate can be fixed (meaning it remains the same) or variable (meaning that it changes as the Federal Reserve adjusts the prime rate), and the term can be from 5 years to 30 years, although the average term is 15 years. Your home is used as collateral, so that if you default, the lender can recover some if its losses by taking your home. A home equity loan can be ideal for consolidating debt or for taking a vacation.
Home equity line of credit
Many financial experts compare a home equity line of credit to a credit card. Instead of giving you a lump sum, a lender lets you know how much you can borrow, and then gives you a way of accessing cash when you need it. Don't be fooled, however. This is still a loan. You can usually choose between a fixed interest rate and a variable interest rate. You make payments on the loan as you go along, and as you access more of your line, the payments can increase. A home equity line of credit is ideal for those wishing to access their homes’ equity in order to do home improvements. It allows you the freedom to get the money you need for improvements as you need it, but without borrowing extra.
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