How to choose between Home Equity Line of Credit and Home Equity Loan

This article will explain the differences between Home Equity Line of Credit and a Home Equity Loan. It will also help you choose which one is best for your situation.

Instructions

Difficulty: Moderately Challenging

Things You’ll Need:

• ownership to a home

1. Understand that either loan is a lien on your property. The differences are in the terms of the loan and disbursment method.
2. Know the difference.
   
   HOME EQUITY LINE OF CREDIT (HELOC): Often a variable rate loan. The rate varies according to the prime rate set by the government. It is set up as a line of credit on the equity available in your house. In other words, whatever you put towards the principal will be available for use again. They can offer interest-only payment options.
   HOME EQUITY LOAN: Often a fixed-rate loan. Usually with a principal and interest payment. Not set up as a line of credit, the funds are disbursed to the borrower at once.
3. Determine the purpose of your loan . As an example, if you need an emergency fund available, a Home Equity LINE OF CREDIT is better, because, in most cases, no payment is due until you use the funds (just like a credit card). On the other hand, if you want to consolidate some credit cards and any other type of loans, a Home Equity LOAN might work better as you have a fix payment and a fix rate. Make sure that new payment is lower than the combined payments of the loans paid off.
4. Shop around for the best deals. Some of the things to compare include: interest rates, prepayment penalty (amount and time), who pays the closing costs,Application fees, closing costs, etc... Federal Credit Unions are exempt from intangible taxes and that can save you some money on closing costs depending on your state.
5. Keep in mind that the interest paid on either loan is tax deductible