The difference between home equity loan and home line of credit.Posted by Nick Niesen on October 29th, 2010 Once you have built up equity in your home, you have the privilege of applying for a home equity line of credit, which allows you to borrow the money you need. In effect, a home equity loan is a second mortgage on your home. You usually get a line of credit up to 70 percent or 80 percent of the appraised value of your home, minus whatever you still owe on your first mortgage. For example, if your home is worth $100,000 and you owe $20,000 on your mortgage, you might receive a home equity line of credit for $60,000 because your lender would subtract your $20,000 owed on the first mortgage from your $80,000 worth of equity. The difference between the two kind of credits is easy: the home equity loan has a fixed rate and the home equity line of credit has a rate that fluctuate and it's better indicate to consolidate other debts than the credit cards. You only pay interest if you carry a balance because these line of credits are essentially a revolving line of credit, like a credit card but with a much lower rate because the line of credit is secured by your home. Like other mortgages, the home equity loan requires you to go through an elaborate process to qualify for an open line of credit. You will usually need a home appraisal and must pay legal and application fees and closing costs. Because a home equity loan is backed by your home as collateral, it is considered more secure by lenders than unsecured debt, such as credit card debt. Further, because the loans are less risky for banks, you benefit by paying a much lower interest rate than you would on credit cards or most other kinds of loans. Home equity loans can therefore offer extremely attractive rates when the prime interest rate is low, but subject you to much higher interest costs if the prime shoots up. You can tap the credit line simply by writing a check, and you can pay back the loan as quickly or as slowly as you like, as long as you meet the minimum payment each month. Like it? Share it!More by this author |