Home Equity Loan vs. Home Equity Line of
Credit
A line of credit is a re-usable loan
secured by a 2nd mortgage on your home. It has a variable
interest rate, usually based on the prime rate as published in
the Wall Street Journal.
Interest is charged on the
outstanding balance, instead of the full amount like a fixed
rate loan. There is a draw period of usually 10 to 15
years, during which you can withdraw money as you need it.
After the draw
period, an
automatic conversion feature changes the account into a fully
amortized equity loan.
An alternative to a home equity line of credit is a home
equity loan, which provides a fixed interest rate and the same
payments each month over term of 5 to 25 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 can be a good
choice for using relatively small amounts with a quick repayment,
and a home equity line can cost
less than a loan. To have the flexibility of accessing money
in specific amounts only when you need it, consider a home
equity credit line.
If a large amount amount of money is needed to
pay off an existing loan, consolidate your debts, or a major
remodeling project, an equity loan may be a good choice, because a
large loan can be easier to pay off with fixed installment payments.
A line of credit usually allows the option of interest only
payments, which could be a temptation to neglect paying down
the principal balance.
One other consideration about a home equity
line of credit, if the account balance gets close to the
maximum credit limit, your credit scores may be reduced,
similar to revolving credit card accounts.
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