Difference of a Home Equity Loan and Line of Credit

A home equity loan and a line of credit both let you borrow money with the use of your home as collateral. This could mean that if you will not be able to pay the money back, the lender could sell your home to get back the money you borrowed. These two are both usually referred to as second mortgages. The reason to consider a second mortgage differs; some could include bill consolidation, college tuition, health costs and home repairs. When it comes to loans, these two kinds are popular. Before you proceed on a second mortgage though, you should be able to distinguish between a home equity loan and a line of credit.

A home equity loan is structured similarly to your first loan. To borrow using this type of loan, you make a one-time choice on the amount you will borrow, close the loan and receive a check for the chosen amount. Your payments will be structured over a period of years. Upon completion of the payments, your home equity loan will be fully paid. Nevertheless, if you later decide that you want to borrow additional funds, you have to arrange for additional loan with additional costs of closing. This kind of loan carries a fixed rate that does not go up and provides a straightforward plan for repaying the money back.

On the other hand, a line of credit allows you to borrow money again and again. It is just like a credit card but the interest is tax deductible. You will also be able to close on a line of credit once. However, if you decide after several months to withdraw additional money, you have to do so up to the loan value. For instance, if you close for $60,000 and pay back over a time $13,000 for the principal amount, the $13,000 could be withdrawn anytime. You have to continue making payments to what you owe just like a home equity loan. Nevertheless, the full loan amount is always available to be drawn so long as the amount that you owe and the amount you borrow do not exceed the total amount of the original line of credit.

A home equity loan payment is the same every month while a line of credit could change and are based on the rate of interest, the borrowed amount and if the loan is in a draw period of repayment period. Remember that you can only borrow up to the amount of the equity of your home, thus if you owe much or less than what your home is worth, you will not be able to acquire a home equity loan or line of credit. The main advantage of borrowing against the equity of your home is that the interest you will pay could be tax deductible. However, do not forget that if you cannot pay the loan, you could be forced to sell your property.

Before you decide between these two kinds of loans, you should consult your loan officer or a financial planner to determine whether a home equity loan or a line of credit is the right one for you.

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