Home Equity VS Home Equity Line of Credit

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Put the equity in your home to work for you

Whether you need to make improvements to your home, send your child to college, consolidate your debt or pay for unexpected medical bills, financing these life events can be a challenge.

Many homeowners use home equity loans and credit lines as a way to handle life’s challenges. Here are some things to consider before determining a strategy that best suits your personal financial situation.

What is the difference between a home equity loan and a home equity line of credit?

A home equity loan involves borrowing a fixed amount of money at one time. With home equity loans, you can generally borrow up to 80 percent of the current appraised value of your home, minus your outstanding mortgage balance. Home equity loans often come with a fixed interest rate and term, and your monthly payments include principal and interest.

With a home equity line of credit (HELOC), you can establish a line of credit against the equity in your home and draw on the money as you need it. The initial amount you can borrow is set by the lender, but you can typically borrow up to 80 percent of the current appraised value of your home, minus your outstanding mortgage balance. HELOCs almost always carry a variable interest rate. You only have to pay interest on the amount outstanding. Keep in mind, though, that the total amount withdrawn will have to be repaid or refinanced at the end of the term.

Loan or line of credit – which option makes the most sense for homeowners?

At first glance, it may seem that a HELOC is the best way to go. A HELOC offers you flexibility because you can draw money from the line of credit as you need it and pay back accordingly. A HELOC can be used for a one-time expenditure or ongoing financing needs. Plus, you may enjoy having a “safety net” available in case of a financial emergency.

On the other hand, a home equity loan can be a good option if you need a set amount of money for a specific purpose. Plus, a home equity loan is a smart choice if you prefer the safety of a fixed rate and fixed payments, especially in a rising rate environment.

As an added benefit, the interest on a home equity line or loan is generally tax-deductible. Please consult your tax adviser about the deductibility of home equity loan interest.

No matter what your borrowing needs, call us for rates and terms on a loan that fits your budget. Call our Loan Department at 215-725-4430.