Accessing Your Equity

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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