As a home owner, you have the ability to use the equity in your home for a variety of purposes, such as to perform home repairs, remodel a kitchen or bathroom, or pay down high interest debt. To determine how much equity you have available, simply deduct the amount you owe on your mortgage from the appraised value of the property. The difference is the amount that can be used for a home equity loan or line of credit. Borrowing from the equity in your home is a low-cost way to pay for projects or to make a one-time purchase, such as a swimming pool.
Home Equity Loan vs. Line of Credit
There are two home equity options available, home equity loan and home equity line of credit. Both are loans that use your home as collateral. Which option is best for you? Here are the pros and cons for you to consider.
Home Equity Loan
|Provides a lump sum up front and requires fixed monthly payments over a specified period of time until paid in full.||Interest rates are slightly higher.|
|Offers lower interest rate than credit cards or personal loans.||Charge fees which vary by lender.|
|Monthly payments remain the same even if interest rates increase.|
|Money does not need to be used for home improvement projects.|
|Offers 10-, 15- and 20-year loan terms.|
Home Equity Line of Credit
|Provides the flexibility for money to be used as needed up to an approved limit.||Offers a variable interest rate; therefore, interest charges will fluctuate, resulting in a change in your monthly payments.|
|Pay interest initially on amount used from credit limit during draw period followed by amortized payments until paid in full.||Charge fees which vary by lender.|
|Better choice for funding home improvement projects that can be finished in stages, or to pay for college tuition over a certain period of time.|
|Offers a 10-year draw period followed by a 10-year amortized repayment schedule.|
Keep in mind that with both loan options, your home is used as collateral; therefore, if you are unable to make your payments due to a financial hardship, then your home could face foreclosure. In addition, if the value of your property were to decrease as a result of a downturn in the housing market and you decide to sell it, you could end up owing more than its worth, or what is referred to as “upside down” in your mortgage. These are just a few things to keep in mind as you consider leveraging the equity in your home.
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