How to Compare Home Equity Line of Credit
As you pay off your mortgage, you begin to build equity in your home. Equity is the value of your home minus the amount of debt you have that uses your home as collateral. For example, if you have a house valued at $300,000 and still owe $160,000 on the mortgage, you have $140,000 of equity in your home. A home equity line of credit allows you to access that equity over time, similar to using a credit card. A home equity loan, in comparison, gives you the entire amount upfront.
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Instructions
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Determine the amount you can borrow under each home equity line of credit. Some lenders may cap your credit line at 80 percent of your home's equity, while others may let you go higher. However, more is not always better. If you have a tendency to overspend, a lower limit may be better because if you cannot repay the loan, you may lose your home.
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Compare interest rates. Most home equity lines of credit have an adjustable interest rate, similar to credit cards, where the rate is equal to a rate index plus a margin. The smaller the margin, the lower your interest rates will be. However, make sure that the interest rate is not simply an introductory rate that will drastically increase after a predetermined period.
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Compare closing costs. Some lenders may offer a lower interest rate but charge more in closing costs to increase their profits.
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Compare the time frames, both for accessing the money in your line of credit and for repaying it. Usually, home equity lines of credit allow you to tap into your credit line for 10 to 20 years, and then you have an additional decade or so to repay the money. If you are planning to use the money for a shorter-term expense, such as college tuition for your two children over the next eight years, you may want only a 10-year term for accessing the money.
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Compare the annual fees charged by the lenders. Unlike with home equity loans, you usually have to pay an annual fee for a home equity line of credit.
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Compare how you are able to access the funds. Some home equity loans allow you to access the funds only by writing special checks. Others may allow you to use a special credit card. Although this consideration is perhaps not as important as the interest rate, if you have a strong preference, you should make sure you know the method of access. For example, if you are using the money for college tuition and the college charges an additional fee for paying by credit card, it would be important for you to be able to access the money via checks.
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