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Home Equity Lines vs. Home Equity Loans - Which Mortgage is Right for You?

Sheryl Landrum
LoanBiz Columnist

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When my clients are looking for a home equity loan or a home equity line of credit (HELOC), they often ask me which loan product they should choose. In order to make an informed choice, a borrower needs to understand the differences between a loan and a credit line.

Home Equity Loan Basics

A home equity loan is a fixed rate, fully amortized loan, meaning your payments will include both principle and interest. Borrowers borrow a fixed amount of money for a set interest rate for a specific time period. Home equity loans, also known as fixed rate seconds, are amortized over thirty years but due in fifteen years.  This means you will have a balloon payment at the end of fifteen years--or you will need to refinance the loan. A benefit of the home equity loan is that you can budget for a fixed payment each month. A negative is that once the loan amount is set, you have to refinance to another loan if you wish to draw more money out of your home's equity.

The ABCs of HELOC

A home equity line of credit (HELOC) is an interest only line of credit. A HELOC has a loan limit that can be used like a line of credit at any time. The interest rate is a variable rate based on the prime rate which is currently at 8%. Interest is only charged on the amount drawn. Payments are interest only for ten years and then fully amortized for twenty. A benefit of a HELOC is you only pay interest on what you draw from your credit line. A negative is that the prime rate has been raised sixteen times in twenty-two months, raising everyone’s payments on their equity lines.

Two Financial Products, One Bottom Line

Remember, that home equity loans and home equity lines of credit (HELOC) are second mortgages and at a higher interest rate than first mortgages. However, their versatility makes them popular as they can be used for new home purchases as well as drawing on your home’s equity for debt consolidation, home remodeling, or simply cash for a rainy day.

About the Author
Sheryl Landrum is a Senior Loan Officer with First Capital Mortgage in San Diego and Prudential Realty in Bonsall, California.

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