Do you need a
home equity loan or line of credit?
by Jakob Jelling
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.
Jakob Jelling may be contacted at
http://www.kitesurfingnow.com .
Jakob Jelling is the founder of
http://www.kitesurfingnow.com. Visit his kitesite for the latest on
kitesurfing equipment, kiteboarding lessons, places to surf and much more!
|
