When considering sources of finance, home equity loans and lines of credit stand out as the cheapest and more flexible financial options. However, you may wonder what the differences between these products are and how to decide which one best suits your needs.
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When you have a mortgage on your home but the value of the property exceeds the amount owed, the difference between the outstanding debt and the property’s value is referred to as Equity. This remaining property value can be used to guarantee another loan: A Home Equity Loan or Line of Credit.
The Loans are secured loans with a fixed or variable interest rate, a fixed loan amount and a fixed, though negotiable, repayment program. These loans are just like any other loan, only they are secured with the equity you’ve built on your home and thus carrie fewer interests.
A Line of Credit on the other hand, comes only with a variable interest rate, there is no fixed loan amount, though there is a credit maximum and the repayment is extremely flexible. The line of credit is also secured on equity.
Interest Rate Of These Financial Products
Since both are secured, the interest rate charged is considerably low. Only the loans with a fixed rate can have a slightly higher interest. The loans with a variable rate usually carry a somewhat lower interest rate. Home equity lines of credit, on the other hand, carry only a variable interest rate that is usually similar to the loan fixed interest rate.
Loan amount Of These Financial Products
These loans come with a fixed loan amount that can equal or be a bit higher than the equity value. The lines of credit are somewhat different: There is no loan amount, a maximum credit amount is set and you can borrow as much money as you need up to that amount. For example: If a $50.000 limit is set you could borrow $10.000 and a month later, borrow $20.000 more. And you could continue to borrow till you reach the credit maximum.
Equity loans come with a fixed repayment schedule which has to be followed strictly with some exceptions. Though, there are (in some cases) grace periods and waivers you could apply for, if you request an equity loan you will probably have rigid installments or at least a fixed amount plus a variable amount depending on interest rate variations.
Home Equity Lines of Credit let you repay the amount you owe they way you want to do it. You have an open line of credit where you can borrow and repay as much as you want as long as you don’t exceed the credit limit. Moreover, as opposed to loans, lines of credit do not require to be renewed as you can always borrow additional funds as long as there is credit left. If your equity grows either by an increase on your property’s value or because of a reduction on your mortgage debt, you can ask for your credit maximum to be recalculated.