Home Equity Line Of Credit

A home equity line of credit (HELOC) is a type of second mortgage that allows you to borrow money against the equity of your home. You can “draw” on the line of credit multiple times from an available amount (credit limit) using special checks or credit cards. You can use the equity in your home to pay for whatever you need, such as home improvements, education and consolidating credit card debt.

How It Works:

There are two phases: the draw period and the repayment period. The draw period means that your line of credit is open and available for you to use. During the draw period, the only payments you are required to make are interest payments on any money borrowed. Once you reach the end of your draw period, you'll have to make repayments based on your principal and remaining interest. Most HELOCs have variable interest rates, which means that they fluctuate based on the changes in the market.

Benefits

  • Home equity lines of credit and home equity loans both allow you to use the equity you’ve built up in your home.

  • Interest rates for home equity loans are fixed, whereas HELOC interest rates vary.

  • Home equity loans give you one lump sum, whereas HELOCs provide funds as needed.

  • Don’t pay unless you use the money.

  • Lower initial rate, then variable.

  • Easier and less costly to get.

Home Equity Loan

A home equity loan is a type of loan where you borrow money using the equity in your home as collateral. Equity is the difference between your home's current market value and the amount you owe on your mortgage. With a home equity loan, you receive a lump sum of money and agree to repay it over a set term with fixed monthly payments. This loan is typically used for major expenses like home improvements or consolidating debt. 

How it works:

You repay the loan in fixed monthly installments over a predetermined term, which typically ranges from 5 to 30 years. The most common terms are 10, 15, or 20 years. The payments include both principal (the amount you borrowed) and interest. The interest rate is usually fixed, meaning it stays the same throughout the term of the loan.

Benefits: 

  • Access to Large Sums: You can borrow a significant amount of money based on your home’s equity, which is useful for major expenses like home improvements or debt consolidation.

  • Fixed Interest Rates: Many home equity loans come with fixed interest rates, providing predictable monthly payments and stability throughout the loan term.

  • Tax Deductibility: In some cases, the interest paid on a home equity loan may be tax-deductible, though this can depend on current tax laws and how the loan is used.

  • Lower Interest Rates: Home equity loans often have lower interest rates compared to unsecured loans or credit cards, potentially saving you money on interest.

  • Potential for Improved Home Value: Using the loan for home improvements can increase your property's value, potentially providing a good return on your investment.