Uncovering The Mysteries Of Home Equity Loans And Lines Of Credit
Posted on May 15, 2008
If youve ever taken out a mortgage, chances are you almost immediately started receiving offers for a home equity loan or home equity line of credit. But what no one ever tells you is why you should choose one over the other or even what the differences in these two mortgage products really are.
So rather than hint around at what a home equity loan or home equity line of credit can offer you (like those many pieces of junk mail youll soon start receiving if you havent already), Im going to spell it out in plain English. So if and when the time comes for you to get one, youll know exactly which product to choose.
Home Equity Loan
Weve all heard the phrase second mortgage and thats a home equity loan.
Simply put, a home equity loan acts like a conventional bank loan that uses your home as collateral. It allows you to tap into your homes equity (the difference between the value of your home and the amount you still owe) and borrow up to that amount. And the money can be used for anything from major purchases to help with the down payment on a new house.
There are also some benefits of going with a home equity loan rather than a conventional bank loan.
These types of loans offer some of the lowest interest rates available.
The interest you pay on this type of loan is usually tax-deductible.
On the downside, if you default on a home equity loan, the lender can take possession of your home.
Home Equity Line of Credit
The main difference between a home equity loan and a home equity line of credit is that while the loan is for a fixed amount, a home equity line of credit is a form of revolving credit that, again, uses your house as collateral.
Based on the equity in your home, you can access as much or as little of your approved credit as you need at any time and you can request an increase in your line of credit as your needs change.
Of course, because your home equity line of credit uses your home as collateral, if you default on your loan, there are serious consequences to be paid. But when it comes to flexible spending, theres no better option.
Meredith Stevens is a former financial news journalist who maintains a keen interest in the field. Now a stay-at-home mother and freelance writer, she writes for several publications about making financial decisions.
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