Home Equity Line of Credit Vs. 30-Year Fixed Mortgage
The home is one of the most valuable assets that most people own. Both 30-year fixed mortgages and home equity lines of credit are loans that use the home as collateral, which means the loan is backed by the value of the home. If the borrower falls behind on payments, the home may be foreclosed on. However, both mortgages and home equity lines of credit offer lower interest rates than other loans.
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Function
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With a 30-year fixed mortgage, you receive the money up front to pay for the home that you are borrowing. Interest is charged on the entire amount you owe. With a home equity line of credit, you receive access to your line of credit when you are approved for the loan. Then, as you charge purchases to or write checks against that line of credit, interest begins to accrue on the amount you have used.
Interest Rate
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The interest rate for a 30-year fixed mortgage remains the same over the life of the loan, which means that you have the same monthly payment over the life of the loan and that your rate will not increase if market rates go up. (Taxes and insurance can affect your total payment.) According to Lending Tree and the Federal Reserve, home equity lines of credit usually have a variable rate that changes as market rates change. This can be beneficial if rates fall because you do not have to refinance to take advantage of the lower rates. However, if interest rates rise, your payment will rise and if you fall behind on your payments you may lose your home.
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Time Frame
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A 30-year fixed mortgage has a term of 30 years. Most lenders will allow you to pay back the loan ahead of schedule, but some will impose an early repayment penalty. Most home equity lines of credit allow you to access your line of credit for 10 to 20 years and then there is a set repayment time period where you must repay all that you have borrowed. For example, you may use the credit line for 15 years and then take 15 more years to repay the principal you have borrowed.
Payments
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With a 30-year fixed mortgage, part of your monthly payment goes towards interest and the remainder is used to pay down the balance you owe on the mortgage. The payment structure changes for home equity lines of credit. For the time period where you are able to access the line of credit, you typically make interest-only payments on the amount you have borrowed. When that time period ends, your outstanding balance is amortized over the time you have to repay the loan.
Tax Breaks
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When you take out a mortgage on your first or second home, you are allowed to deduct the interest that you pay on the first $500,000 of the mortgage. If you file a joint return with your spouse, the limit increases to the interest on the first $1 million of mortgage debt. With a home equity line of credit, the same limits only apply if you are are using the proceeds from the loan for home improvements. If you use the loan for other purposes, you can deduct the interest on the first $50,000 ($100,000 if you file a joint return).
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