Comparing Home equity loans and lines of credit

Owning a home is the best investment that most people make in their entire lives. As the home mortgage is paid down and the property rises in value due to appreciation, the homeowner develops equity. Equity is merely the difference between the homes current market value and the outstanding mortgage balance. Having a fair amount of equity in your home enables you to take out a loan against this equity or to take out a line of credit. In order to decide which is right for you, you need to decide what the money will be used for and how much money you will actually need.

A home equity line of credit is great if you have ongoing cash needs such as tuition or medical expenses. If you need money for a one time purpose such as a purchasing a car or perhaps even taking an exotic vacation, you may want to consider a home equity loan. It's important to remember that both a home equity line of credit and a home equity loan are essentially a second mortgage on your home. The difference is that a home equity line of credit is a revolving line of credit much like a credit card (you will usually receive a credit card in the mail after you have been approved for a home equity loan) and with a home equity loan you will receive a lump sum of cash with scheduled monthly payments.

Contrary to popular belief, both home equity loans and home equity lines of credit do not necessarily enable you to borrow against all of the equity in your home. Factors such as your annual income, your total debt burden, the market value of your home, how much you owe on your other mortgages, and your past credit history are all used to determine the amount you can borrow. If and only if all of these factors are favorable will you be able to borrow against all of the equity in your home. What makes home equity loans and home equity lines of credit so appealing are their notoriously low interest rates. Because both are secured by the equity in your home, lenders typically charge much lower interest rates than they do with normal lines of credit.

Once you have determined what your cash needs are you, next need to familiarize yourself with the specifics of either the loan or the line of credit that you will be taking out. Home equity lines of credit typically carry lower interest rates than home equity loans but it's interest rate tends to fluctuate based on the prime rate.

With a home equity loan, the interest rate is fixed but you have to factor in closing costs and other fees including appraisal fees, loan origination fees, title search and insurance, taxes, deed fees, credit report charges, and others. In short, home loans have a lot of fees attached to them and these can quickly become very expensive. Both home equity lines of credit and home loans have pros and cons associated with them and you need to weigh them carefully before deciding what you need.