As of lately, obtaining cash from one's home has never been simpler for homeowners. With the low interest rates over the last few years, everyone that wanted to refinance has done so leaving the lending market semi- stagnant. At this point, lenders are anxious to loan to anyone that barely meets their criteria. Knowing what type of loan that suits your situation best is very important before you feed yourself to the "loan lions"! There has been a recent flood of companies offering home equity loans and lines of credit. To make Home repairs or put on additions, more and more Americans are looking toward lines of home equity credit rather than a traditional home equity loan(also known as a second mortgage). Americans need to consider multiple things prior to utilizing either of the above two financing products. Home equity lines of credit usually are appropriate for people who need a lower beginning rate and availability to money at unpredictable times. A home equity line is also good if you are unsure what the project will cost. Many homeowners are doing the contracting themselves. In this case a home equity line of credit is best as you simply pay for the project in an ongoing basis until completion, thus borrowing only what is needed and not coming up short due to unforeseen overages. Home equity loans are more appropriate for those who need specific amounts of cash with payment stability. The biggest difference between these loans is the method in which you receive your money. Using a home equity loan, you receive the whole amount of money at closing. Using a home equity line of credit, one can borrow cash when needed, up to a pre-determined amount of credit. See the following comparison for additional details. (a) Loan Funds Availability: Home Equity Line of Credit - Borrow money when needed. You can borrow up to the stated credit limit. When you pay down principal it is added back onto the balance of your credit line to be used later. Home Equity Loan - Receive entire loan amount at closing in a lump sum. You can not reuse this loan amount after principal is paid back. (b) Interest Rate: Home Equity Line of Credit - Variable rate. Beyond the first monthly billing cycle, your interest rate is determined monthly, usually determined by the prime rate, when posted in The Wall Street Journal, in addition to a operational margin. Home Equity Loan - Fixed rate, Interest and payment stays the same. (c) Payment Structure: Home Equity Line of Credit - Monthly payments vary with interest rate and amount of principal which has been borrowed. These loans have a draw period, usually of 5 or 10 years, during this time you have the option to pay only the interest, however beyond the draw period you must repay the principal and interest to pay down the loan within the remaining years. Home Equity Loan - Interest and principal payment stay the same during the loan term. (d) Loan Advances: Home Equity Line of Credit - Simply write a bank draft for $250.00 or more. Home Equity Loan - Entire amount is received at closing. (e) Rate Advantages: Home Equity Line of Credit - Less interest rates than your unsecured credit lines such as credit cards. Home Equity Loan - Lower payment options are available due to a variety of terms. (f) Tax Advantages(Ask your tax advisor): The interest on both types of loans may be 100% deductible! (g) Other Advantages: Home Equity Line of Credit - Appropriate emergency fund for unexpected emergencies or expenses. Can incorporate multiple projects at one time. Home Equity Loan - Single use, less temptation to borrow more by just writing a check. Stable loan with a fixed rate, fixed payment and easier to budget for. Our intention with this report was to clear up the confusion between the two loans. Always be sure to do your due diligence before you apply for any type of loan. Make sure you are well informed before seeking a lender. I know it's hard to believe but not all lenders will be honest and upfront with the finer details of the loan you seek!
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