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A home equity line of credit is very closely related to a home equity loan but
the subtle differences can mean a lot. Determining which option is the best for
you relies upon you knowing your current situation and having a clear plan for
what you wish to accomplish with the money.
A home equity loan is a lot
like a mortgage. With a home equity loan you are able to borrow the amount of
your homes value that you have already paid off. The benefits of this type of
loan is that it is almost always guaranteed since it is based upon the amount of
your home that you already own, the terms are almost identical to a mortgage and
you receive the entire amount of the loan up front after closing.
While
a home equity loan is also based upon the amount of your home that you currently
own, the terms of the loan are very different. A home equity loan is basically a
credit card where the limit is the amount of equity that you have in our home.
Instead of receiving one large lump sum of cash, you will receive an overdraft
type of service on your account that will allow you to withdraw as much or as
little of the equity that you wish to use.
Which choice is better for
you? The answer depends upon what you need the money for. With a home equity
loan the monthly repayment schedule is known and the interest on your loan will
be lower than most other types of loans. However, with a home equity line of
credit, you have instant access to cash and the payments will vary depending but
the interest will vary. With this in mind the question really becomes do you
need access to a varying amount of money or one known lump sum of cash?
A lump sum of cash with a set repayment schedule is great for specific
things such as debt consolidation or the funding of specific projects with a
predetermined cost. If you are considering debt consolidation for credit cards
or any other high interest loans a home equity loan is most likely a very good
idea. You will be able to repay all of your debt and will only have to make one
monthly payment at a lower rate of interest that you are currently paying on
your cards and other unsecured loans.
Home equity loans also make
perfect sense if you know the exact amount that you need to borrow. While it is
always nice to have cash on hand it is often better to have more credit
available to you. The more of your credit limit that you use up the higher the
interest rates will be for you and the tougher it will be to borrow more money
in the event of an emergency. It is definitely to your advantage to only be in
debt for a specific amount to complete one project.
A line of credit
option may be better depending upon what you wish to do with your money. While
you will still use up a portion of your credit limit, the payments and impacts
on your available credit may be lower. With a line of credit you always have the
same amount of money available to you. As you pay off the amount of credit used,
you can reuse that portion if needed without having to apply for another loan.
Also your payments may be considerably lower since you are only paying on the
amount of money that you have actually used, not the total amount borrowed.
As you can see there are some big differences between a home equity loan
and line of credit. If you are looking at a single project, such as a new car or
adding a pool to your home, a home equity loan is the better choice for you.
However, if you are looking at starting up a new business, wish to travel or can
not settle on predetermined amount money, then a line of credit is the better
option for you. With a line of credit you can use as much of your credit as you
wish whenever you wish and, much like a credit card, you can reuse the amount of
the line of credit that you have repaid with out having to re-apply for a loan. |
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