Mortgage Calculator: Understand pros and cons of Home Equity Loan vs. Home Equity Line of Credit

When you need cash for home improvements, college tuition, or a business startup, a home equity loan or home equity line of credit can make sense. But these financial vehicles come with risks, so make sure you understand how they work and have the financial discipline to meet the obligations before you apply.

Home Equity Loan and Home Equity Line of Credit: The Similarities

Both home equity loans and home equity lines of credit, or HELOCs, let you borrow against the equity in your home, with your home serving as collateral. You can often deduct the interest for both types of loans on your tax return, but there are restrictions, so check with your tax advisor or the IRS.

Home Equity Loan and Credit Line Risks

When you can't pay your credit card bills, you lose your card privileges and credit score points. But when you can't pay off your home equity or HELOC, you risk losing your home. A growing number of Americans are facing that very situation. Delinquencies on both types of loans have climbed steadily since the recession began and reached record highs in the second quarter of this year, the American Bankers Association reported.

Loan or Credit Line: How They Differ

A home equity loan, also called a second mortgage, provides a lump sum at a fixed or variable interest rate over a certain period of time, usually 10 or 15 years. A home equity line of credit is a revolving credit account open for a certain amount of time, such as 10 years, and works much like your credit card. The lender agrees to a maximum amount of money you can borrow, and then you can draw up to that amount at any time, although there may be some restrictions.

When a Loan Makes Sense

Home equity loans work best when you need a lump sum of cash to pay for something all at once, such as debt consolidation or a new roof. The interest rate is usually locked in when you get the loan, so payments are predictable, and although the interest rate is higher than mortgage rates, it's lower than rates on credit cards.

Credit Line Pros

A credit line works well when you have expenses over a period of time, such as phased home-improvement projects or college tuition payments. With a credit line, you can borrow as much as you need when you need it. Although the rates are variable, they are typically lower than what you pay on your credit card, and some lenders let you lock in a fixed rate.

Compare Loan Rates

Shop around and get quotes from lenders, whether you pursue a home equity loan or HELOC. Use a loan comparison calculator to compare loans with different rates, amounts, or terms and for a home equity loan, use an amortization schedule calculator to view payments on interest and principal over time.

Posted By :
Barbara Marquand is a freelance writer who writes frequently on mortgage and personal finance topics.

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