Choosing Between The Two Primary Types Of Home Equity Loans

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If you are ready to tap into the value of your real estate, it is likely that like most people, you will need to decide whether a home equity line of credit (HELOC) or a home equity loan is best for you. Each home equity loan option comes with both pros and cons which you will need to will need to weigh against your unique situation in order to choose the best option in your case.

Home Equity Line of Credit
A home equity line of credit (HELOC) is very similar to a credit card in that it has a set limit and you can draw on it periodically. The borrower has a minimum monthly payment with a rate that fluctuates according to the fluctuation of the prime rate. One of the advantages is that the APR is bases on the periodic interest rate and, unlike equity loans, does not include points or additional charges. These home equity loans are a better choice for those needing ongoing cash to pay for unexpected or shorter term expenses, rather than when you need a large one lump sum.

Home Equity Loan
A home equity loan, or second mortgage will allow homeowners to unlock a portion of the equity of the home. Just ...
... like a personal loan, a home equity loan is received all at once. In most cases, the homeowner chooses between a fixed or variable rate of interest and comes with a fixed payment amount each month. The APR of a home equity loan is based on the interest rate charged as well as points and additional charges that are incurred. This option is preferable when money is needed to finance a large purchase or project such as for home improvement.

When choosing between a home equity line of credit and a home equity loan, you should consider how you will use the money, the amount flexibility you anticipate needing and how well each will fit into your plans to pay back the loan. It is also important to remember that each will carry an interest rate that is higher than the original mortgage, but is more affordable than most forms of unsecured debt. Before making your decision, it may be helpful to talk to a tax professional to see how you can leverage the loan to you best advantage.
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