Home Equity – Loans Vs Lines of Credit


One of the advantages of owning a home is that we can use our equity on it to have access on additional cash. This can be very helpful. There are two ways to borrow against the value of our property. There is the home equity line of credit and there is also the home equity loan. Choosing one that fits our needs is essential because this will put our property at risk. What are the differences between the two? How to choose between them? In order to choose what to use, let us understand each of them. Bear in mind that both of them can be tax deductible. Consult a tax expert for this.Home Equity Loans (HEL)This is a type of loan that utilizes the property as its collateral. The loans can be used in different things like college education and home repairs. Such loan will reduce the home equity. How this works, you may ask. Well, you will be given lump sum money. You will need to pay this monthly. This will have either a fixed or an adjustable rate. The payment will be done within the predetermined period.Ask your lender for requirements but you will typically need a proof of income and other related financial statements. You should also be able to prove that you paid at least 20% of the house. The lender may require for the appraisal of your property.The amount you will be granted depends on the how the evaluation of your requirements and your property will go. However, you can borrow as much as 100% of the value of your property.Home Equity Lines of Credit (HELOC)The Home Equity Line of credit is similar with the Home Equity Loans in many ways. Just like the HEL, you will need to qualify first before you will be granted credit. You will need proof of income and home ownership. In addition to that, appraisal may be necessary as well. What makes this different from the HEL is that it is a revolving credit that works like a credit card. The amount of money is not given in lump sum. However, it is available whenever you need it.Another difference is that the HELOC does not have a fixed amount to be paid monthly. The borrower will only pay the amount used and can pay as less as the interest. However, this will only last for a certain period. Once the predetermined period expires, the homeowner has to pay off the entire amount borrowed plus the interest. The interest is not fixed as well. This will depend on the prime interest rate and the margin determined by the lender. The initial interest of the HELOC is lower than HEL. However, it is riskier because the rate changes.Both of these borrowing techniques will use your property as insurance, which is why you have to be very careful. If you are going to use HELOC, see to it that you do not use the credit when not in need as your debt can get out of hand.Consider all essential factors before you decide which one to use.