Contrasting a Home Equity Loan with a Line of Credit

Many homeowners do not understand the difference between a home equity loan and line of credit. They both are borrowing money from the available equity in your home. However, they both have several differences in the way they are administered. Here are a few key aspects of home equity loans and lines of credit.

Home Equity Loans

Home equity loans are on a fixed schedule. You borrow a fixed amount of money on the front end of the transaction and spend the rest of the time paying it back. You have a fixed rate of interest and a fixed monthly payment. You have a certain amount of time to pay off the balance. The interest rate on these types of loans is typically smaller than you will get for a line of credit. This type of loan is great when you know exactly how much you are going to spend on a large project. This type of loan is fantastic for a large home remodel project.

Home Equity Line of Credit

A line of credit is similar to a home equity loan except it is much more flexible. You will usually pay a higher interest rate on these than you would with a home equity loan. With this type of setup, you do not borrow a certain amount of money on the front end. Your lender will give you a credit limit that can be as much as you want up to the level of equity in your home. Once your credit limit is established, they will give you checks that you can use to access the available line of credit. When you need to access the money, you simply write a check to anyone just like you would with a regular checking account.

For example, you might have a home equity line of credit for $30,000. You do not owe them any money just for opening the line of credit. You can have the line of credit sit there for as long as you want. Then when you need the money, you simply write a check for it. Let's say that you needed $5000 for an emergency. You now have $25,000 of available credit and you have to start paying back the $5000 with interest. There is no set repayment period and your payment options are flexible.

Similarities

While home equity loans and lines of credit have a few key differences, they have similarities as well. For one thing, you are still tapping into your home equity regardless of how you do it. Another common trait is that you can deduct the interest on your income taxes. This applies only if you can itemize your deductions and you can only deduct the interest on the first $100,000 borrowed. The savings that this can net you on your taxes can be pretty substantial. Regardless of which way you choose to access your funds, they can both be beneficial for the right situation.

blog comments powered by Disqus