Home Equity Loan or Home Equity Line Of Credit?

Types of Home Equity Borrowing

Home Equity Loan – commonly referred to as a second mortgage – is the most common form of turning your home equity into  usable cash. Usually, the second mortgage is on a fixed and shorter term than the first, although some can last up to 30 years. People usually choose home equity loans when they want a large lump sum of cash.

Home Equity Line of Credit – Unlike home equity loans, which tend to be repaid at a fixed rate for a set amount of time, like a car  loan, HELOCs are set up more like a credit card, with a revolving line of credit for smaller purchases that might change every month.

Loan or Line of Credit?

A home equity loan and a home equity line of credit (HELOC) sound very similar, and the process of applying for both is similar, too. As we move forward, we’ll discuss second mortgages more generally, because the steps you’ll take will be essentially the same. But for now, you need to figure out which product is a better fit for your needs.

A second mortgage is a loan that’s secured by the value of your home when you still have a first mortgage. If you need a large, fixed amount of money for repairs or other expenses, taking out a second mortgage can allow you to pay for them at a favorable interest rate. This is an option for major planned purchases or for really expensive emergencies. 

A home equity line of credit is like having a credit card that’s secured by your home. Some institutions issue a plastic card that can be used to advance the funds, while others do not. In latter cases, that credit line can be accessed online or at a branch. Like a credit card, there is a credit limit. In a home equity loan, the limit is usually pegged to the value of your house and what is still owed on the first mortgage at the time of opening the account. It’s good for a specific term, called a “draw period,” which is generally 10 to 15 years. In many cases, the interest on a HELOC is tax-deductible, but you should confirm that with your trusted tax preparation professional.

If you want a large chunk of money right now, you need a home equity loan. If you need small amounts of money over time, consider a home equity line of credit.

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