Home Equity Loan vs Line of Credit – What You Need to Know
Understanding the difference between loans, like home equity loan vs line of credit, can be a challenge to learn about if you are not familiar with them. There is a lot of lingo that most of don’t hear every day and there is a great deal that one must know about before signing on the bottom line. Once you have gained some knowledge, making the decision as to which loan would be right for you can be a challenge.
Loans are generally long term and we don’t know what the future holds. Today’s economy is getting muddier and we just don’t know anymore. We must stay focused on what we have currently and work with that the best we can. If you are trying to maintain your current financial situation but think that a loan would help, then obtaining a loan should be considered.
Accessing your current assets to obtain financial security is your best bet. The question is which asset can you use and how will you gain from it? Your home is probably the biggest asset that you have. You worked hard to get your home and your home means a lot to you. You don’t want to take any chances on affecting that love you have for your home. This is a very good reason to understand the difference between a home equity loan vs line of credit.
A home equity loan accesses the amount of value that your home currently has and is a one lump sum. A line of credit (LOC) accesses your credit and you don’t have to use the entire amount approved. Like all loans, when choosing a home equity loan vs line of credit, both have their good points and their bad points.
A home equity loan will have an interest rate that is attached to every penny that you receive. For a LOC, you are only charged interest on the amount that you take out. For example, on the equity loan, if you get $50,000 you are charged interest on that amount for the entire length of the loan. If you get a LOC and approved for $50,000 but only take $30,000 then interest is only applied to the $30,000. Now if you were to take out an additional $5,000 on the LOC six months later, then interest would begin being added for that additional $5,000 you took out. These differences must be considered when reviewing a home equity loan vs line of credit.
For the home equity loan, you will make payments on a regular basis until the loan is paid in full. Once the loan has been paid off, then that that. If you need more funds, you have to start the entire process all over and apply again for another loan.
For a LOC, you will make payments as you would for the home equity loan but the bank could ask for balance in full at a certain date if this is stated in the contract. One very attractive benefit to a LOC is that once you have paid down your balance, if there is an amount open you can request to use that money. If you do use it, then your payments will be recalculated to include the new amount that you withdrew.
Borrowing any money today is a very big decision. Weighing the differences and benefits between a home equity loan vs line of credit should take some time and thought and ask lots of questions before you sign your name.