| There are advantages and disadvantages to both | | | | the risk inherent in home equity lines of credit is that |
| home equity loans (HELs) and home equity lines of | | | | you could end up borrowing more over time that you |
| credit (HELOCs), making the choice between the two | | | | can realistically pay off. |
| dependent on your unique needs and circumstances. | | | | Interest Rate and Monthly Payments |
| Amount You Can Borrow | | | | Both HELOCs and HELs generally carry lower interest |
| Both home equity loans and lines of credit allow you to | | | | rates than conventional bank loans and credit cards, as |
| borrow up to 100% of the equity in your home. In some | | | | they are secured by borrowing against your home. |
| cases, lenders will even allow you to borrow up to | | | | They both, however, commonly carry interest rates |
| 125% of your home equity. | | | | higher than that of your primary mortgage (or first |
| Qualifying Requirements | | | | mortgage). Interest on both instruments may be tax |
| Both HELs and HELOCs require you show proof of | | | | deductible (to find out, check with your tax advisor). |
| the following: | | | | Interest paid on both of these instruments (HELs and |
| * personal income; | | | | HELOCs) is also usually tax deductible, whereas |
| * ownership of the home ownership (ie. Title); | | | | interest paid on conventional bank loans and credit |
| * current mortgage; | | | | cards is not. |
| * current value of the home (via a professional | | | | The interest rate and monthly payments on a home |
| appraisal). | | | | equity loan is fixed, allowing you to budget accordingly, |
| A home equity loan additionally requires proof that at | | | | though in many cases you could opt for an adjustable |
| least 20% of the home's value has already been paid | | | | rate (though that isn't always advisable). The payment |
| off. So, if you have yet to pay off at least that much | | | | term on a home equity loan is also fixed, meaning that |
| of your home's value, then your choice of which | | | | you must pay it off in full by a predetermined point in |
| instrument to apply for is made for you. | | | | time. |
| Purpose for the Money | | | | The interest rate and monthly payments on a home |
| If you wish to use the money borrowed in a lump sum | | | | equity line of credit is not fixed and will fluctuate over |
| for a single, one-time expense (ie. a particular | | | | time, based on fluctuations in the prime rate, so |
| renovation, an emergency, a desired purchase, or to | | | | budgeting accordingly can be much more challenging. |
| consolidate debt), then a home equity loan may be the | | | | The interest on a home equity line of credit is also |
| better choice. | | | | typically higher than that of a home equity loan. The |
| If you don't have a single, particular use for the money | | | | payment term on a home equity line of credit, |
| in mind and don't think you'll need the money all at once | | | | however, is not fixed, and so long as you keep making |
| but rather feel that you'll be needing it on a periodic | | | | minimum payments, you could conceivably stretch out |
| basis (ie. for lengthy and drawn-out remodels, medical | | | | the payment period indefinitely. |
| bills, or college tuition payments that will be made in | | | | Closing Costs |
| intermittent sums), then a home equity line of credit | | | | Like other loans, a home equity loan comes with |
| may be the better choice. | | | | certain closing costs that must be covered in advance |
| The HELOC gives you a flexibility that a home equity | | | | of receiving the loan. |
| loan does not, allowing you to borrow however much | | | | There are usually no closing costs involved in a home |
| you need, at the time that you need it, rather than | | | | equity line of credit, though you may have to pay an |
| taking out more than you need at once and, | | | | annual fee. |
| subsequently, paying interest on the whole amount | | | | Collateral |
| from day one. Rather than receiving a fixed lump sum | | | | Remember, that in either case, your home is |
| all at once, with a HELOC, you're usually given checks | | | | considered the collateral for payment. |
| or a credit card to use on an as needed basis. Part of | | | | |