Home Equity Loans & Lines of Credit

When an individual needs cash at home without necessary selling an asset, one can consider getting either a home equity line of credit or a home equity loan. These mortgage products are similar but with slight differences. An individual can choose any of the loans depending on the value of the house.

Both lending methods are calculated by using the value of the home minus outstanding loans plus the new loan requested. When one adds, for example, the 1st mortgage and the 2nd mortgage minus the loan to value, it should not exceed 80% of the home value. Some financial institutions may go as high as 90% either on home equity line or home equity line of credit.

Important Considerations

A home equity loan is usually referred to as second mortgage loan because like the primary mortgage it is directly secured by the individual`s property. It is  second in the line of paying off in case one defaults.

The loan is also a lump sum because when an individual borrows this kind of loan, they will not borrow any money from that same home equity loan. It is suitable for an individual who needs the cash all at once or for a particular time or event. It is suitable for activities such as financing a wedding, paying off more expensive debt or financing home renovations to name a few.

One major benefit of home equity loans is that they often have fixed interest rates. It will make the monthly instalments very predictable. Additionally, for those people who are living on fixed income, one can plan accordingly on how to repay the mortgage loan.

Home equity loan is under amortized loans; people are supposed to pay both principal and interest the same time. Home equity line of credit is different from home equity loan in this case because an individual is expected to pay interest only.

Pros & Cons

The main advantage of a home equity line of credit is that someone only needs to pay interest on what one spends. For the lenders, they advise people to take the minimum draw period. This type of mortgage loan is very tempting to borrow. It is not a good idea to rush quickly before framing one financial payment. Both the home equity loan and home equity line of credit, one home is the collateral for the borrowed loan.

Who Offers Them?

A home equity line of credit tends to have have fewer initial costs than a home equity loan. Banks that offer home equity line of credits usually charge an appraisal fee to verify the home's value. A home equity line of credit has a different way of depositing money to individuals' accounts. Instead of a lump sum, they provide money to an individual when the need arises until all the money is repaid. Home equity line of credit have several important phases: repaying the mortgage, repayment period and draw time.

How to Use?

For example, if an individual secured a loan in 2015 and the draw period is ten years, then this means that they will be borrowing the credit until 2025. After 2025, the repayment period starts, and one is no longer allowed to borrow money. In the refund period which can last from five to twenty years, one should pay the principal and the interest on the remaining funds.

Some experts say that the home equity line of credit is structured in such a way that it is more flexible in borrowing than home equity loan. For example, with Citibank, people can access line of credit funds for a draw period of five years and then they have twenty years as repayment period.