Home Equity Loan or HELOC: Which is right for you?

March 2006

Despite all of your methodical financial planning, the time may come when you need cash in a hurry. Maybe you want to consolidate your debts. Perhaps you want to refinish your basement. Or suppose you saved up for a state university’s tuition, but your kid got into Harvard. These are the times your home equity can ride to the rescue.

Your house is not just your home; it can also be a financial safe harbor when your fiscal storm clouds start gathering. There are two simple ways to access the equity you’ve built up in your home without refinancing. Although the interest on both may be tax-deductible, there are plenty of differences between them.  Grab your binoculars and have a closer look.

Steady as She Goes

Meet the more traditional of our two options: the home equity loan. Often called a second mortgage, it’s a smaller and shorter-term version of your regular mortgage loan. The loan amount is paid out as a lump sum, and your repayment is amortized on a fixed interest rate, so that your monthly payments are predictable. 

 A home equity loan is right for you if:

 (1) You prefer steady-as-clockwork monthly costs.

(2) You need a long-term payment plan with predictable interest rates.

(3) You need the entire amount of cash all at once.

 Calming the Stormy Seas

A home equity line of credit (HELOC) behaves less like a mortgage loan, and more like a credit card with a high spending limit and low interest rate. Instead of receiving one large check, you may access your line of credit through convenience checks and debit cards, as needed, to meet whatever demands you face. Your monthly payment will be based on how much of your credit line you actually use. 

The interest rate is adjustable. Therefore, you can't be sure what your rates are going to be a few years down the road. Add the unpredictable nature of the interest rate to the ebb and flow of funds in and out of your HELOC, and your monthly bill will rarely be the same. It's up to you to use the line of credit responsibly, but in return for your efforts, you can get cash when you need it and only pay interest on what you actually use. The key word here is flexible.

Tapping into your home equity can help smooth the bumpy ride on the sea of life. Tax benefits, low rates, and a direct line into as much as 80 percent of your home’s value—these are reasons to set sail with the winds of home equity behind you.

by Mortgageloan.com  Staff Editor 

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