Home Equity Line of Credit

While a home equity line of credit is closely related to a home equity loan, the differences between them and mean a lot. Figuring out which option is best for you depends on your awareness of your current situation and that you have a clear plan for what to accomplish with the money.

First, home equity loans are like a mortgage. You are allowed to borrow the total amount of your home’s value that has already been paid off. Because the loan is based on the value of a home you already own, it’s almost a guaranteed loan. You will receive the entire loan amount up front after closing with terms that are almost identical to a regular mortgage. HOME EQUITY LINE OF CREDIT

Even though a home equity line of credit is also based on the amount of your currently owned home, the terms of this loan might look very different. Basically it like a credit card, the limit on a home equity line of credit is the amount of equity you actually have in your home. You receive an overdraft type of service on your account, instead of one large lump sum of cash, that will allow you to withdraw as much or as little of the equity you might wish to use at anytime. So which option to choose?

First ask yourself: what is the need for the money? On this type of equity loan the monthly repayment schedule is already know and interest on the it will be lower than most other types of loans. When you have a home equity line of credit you will have instant access to cash and both the payments and the interest will vary. You have to decide – are you going to need one lump sum of cash immediately or varying amounts of money at different intervals.

Sometimes you need a lump sum of cash, with a set repayment schedule, which is great for debt consolidation or being able to fund a project with predetermined costs. A home equity loan would be an excellent idea if you are thinking of debt consolidation for your credit cards or any other high interest loans. If you are currently paying on your cards and other unsecured loans, this would allow you to repay all of your debt and then have only one monthly payment to make at a lower rate of interest.

When you know the exact amount of money you need to borrow, home equity loans make perfect sense. Even though it’s nice to have cash on hand, many times it’s even better to have more credit available to you. Remember that the more of your credit limit you use, the higher the interest rates will be for you and it will also be tougher to borrow more money in the event of an emergency. It would be best, and to your advantage, to be in debt for a specific amount on one project.

Depending on what you need to do with the money, a line of credit option may be best. Even though you are still using a portion of your credit lime, payments and impacts on your available credit may still be lower. At least with the line of credit you always have the same amount of money available. Also, as you pay of the amount of credit used, you then can reuse that amount if needed without applying for another loan. Plus, your payments may be a lot lower since you’re not paying the total amount borrowed, just the amount of money you have actually used at that point.

There are some large differences between a line of credit and a home equity loan, as you have seen. Single projects, like a new car or deciding to add a pool to your home, would definitely make a home equity loan a much better and wiser choice for you. Then again, if what you’re looking at is starting up a new business, taking off for travel, or just not sure about a predetermined amount of money, the line of credit is a better option. Just keep in mind that a line of credit gives you the option of using as much of your credit as you want to whenever you want to, and like a credit card, you can reuse the amount you’ve repaid without having to reapply for another loan.

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