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Difference between home equity loans and lines

If you are new to the real estate business, there are probably several closely related terms that are confusing. Two of these terms are home equity loans and home equity lines.

An article, “Home Equity Loans and Home Equity Lines,” released by mortgage-x.com, provides some clarity and important information regarding home equity loans and lines.

The first thing to understand is the basic idea that a home equity loan works like a second mortgage, while the equity line is more like a credit card.

“Where the traditional equity loan gives the homeowner money in one lump sum, the home equity line of credit allows homeowners to obtain cash when they need and to pay interest only on the outstanding balance. So you should use an equity loan when you need all the money up front and it is more advantageous using an equity line if you have an ongoing need for money.”

Unlike the home equity loan, the home equity line is usually open-ended meaning that it can last up to the duration of your home ownership.

“Another factor to consider when choosing between home equity loans and equity lines is your monthly payment. Home equity loans usually have fixed interest rates and fixed payment amounts, while most home equity lines are of the adjustable-rate and if the interest rate goes up, so does your monthly payment.”

Home equity lines could also experience the reverse effect; if interest rates go down, so does your monthly payment.

“Home equity lines are almost always tied to the prime rate plus some margin, with at least a lifetime cap on rate movements. Some home equity lines may have an introductory rate.”

Since home equity lines act as credit cards, it may be advantageous to compare your equity lines rates with that of your credit card. “If you know that tax bracket is 30% and the rate of the equity line is 9% then your effective rate is: 9% x (1-0.3) = 6.3% Now you can compare this rate with your credit card rate.”

Your credit card also probably does not offer a limit in the sizable amount that your equity line will.

Home equity loans and lines serve their different purposes. Like with any money borrowing, make sure you understand terms and clauses in your contract before signing anything. And do your homework; research and compare rates to different lenders.

It is best to start off with many options and then eliminate them one-by-one as you examine the pros and cons.

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