As the mortgage industry spirals downward, home equity loans may also lose some of their sheen. Home equity lines of credit and home equity loans are second mortgages taken out against the equity in your home. The equity in your home is the difference between your outstanding mortgage balance and the home's appraised value.
Here is a brief comparison between a Home Equity Loan and a Home Equity Line of Credit.
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Home Equity Loan |
Home Line of Credit (HELOC) |
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What is It? |
It is a fixed or adjustable mortgage rate secured by the equity in your home |
An open-ended variable interest rate loan, paid as revolving line of credit secured by the equity in your home. |
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How do you qualify? |
You need:
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You need:
- proof of home ownership
- proof of income
- equity in your home
- property appraisal
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What is the length of the loan? |
Between 1 to 30 years |
Line of credit is available for 10 to 20 years (you can pay only interest), after which your HELOC becomes fixed interest rate loan and you have to pay the outstanding balance and interest |
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What is the method of payment? |
One time lump sum payment given to you. |
Use it like a credit card or checking account. Use the revolving line of credit as needed |
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What are the costs? |
Usually the interest rate is higher than a HELOC. May have some closing costs, if so lower than your first mortgage. Might have prepayment penalties. |
Usually no closing costs. |
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Are there tax benefits? |
Consult your tax advisor regarding the deductibility of the interest |
Consult your tax advisor regarding the deductibility of the interest |
Home equity loans and lines of credit (HELOCs) are not as popular as they were in the recent real estate boom. However, they are still a good tool for paying for home improvements, debt consolidation, and paying off other major purchases. So take out either a home equity loan or home equity line of credit as needed.