A Home Equity Loan or a Home Equity Line of Credit
Home equity loans are essentially second mortgages with a fixed interest rate, and the same payments each month over term of 5 to 20 years. There is a one-time distribution of the loan, and once you get the money, you cannot borrow further from the loan.
A home equity line of credit is a re-usable loan secured by a second mortgage on your home. It has a variable interest rate, usually based on the prime rate as published in the Wall Street Journal. There is a draw period of 10 to 15 years, during which you can withdraw the money as you need it, and use it again as you pay it off. At the end of the draw period, the line of credit either converts to a fully amortized loan or must be paid off.
If a large amount amount of money is needed to pay off an existing loan, consolidate your debts, or a major remodeling project, a home equity loan may be a better choice because a large loan amount can be easier to pay off with a specific period of fixed installment payments. Since a home equity line of credit allows the option of an interest only payment, there is a great temptation to neglect paying down the principal balance. Also, with a variable interest rate, there is a risk that over a longer period of time, you could end up paying more if rates were to rise high enough./p>
If you intend borrow relatively small amounts and pay back the principal quickly, a line of credit can cost less than a home equity loan. A line of credit provides the flexibility of accessing money in amounts only when you need it. |
