Difference between home equity loan and home equity line of credit

You can cash-in on your home’s equity in two ways, one is through a home equity loan and the other is through home equity line of credit or HELOC. Both of these terms are often confused with one another. Let’s take a look at their difference so that we can understand their purposes better.A home equity line of credit allows a borrower to borrow as much money as required until they reach their credit limit in borrowing. When the principal amount is paid up, their credit amount is made available to them once more so that they can use it again later. So, a home equity line of credit can be re-used. The interest rate calculated on the borrowed amount for a home equity line of credit is variable. After the first month’s payment, the interest rate will change from the upcoming months and this variable rate is based on the prime rate published in “The Wall Street Journal” plus a margin. The payment you make in a home equity line of credit will vary depending on the amount borrowed and the interest rate. You have the option of paying only the interest amount during the five or ten year draw period. At the end of the draw period your monthly payments will change as the principal and interest amount both will be included in your payments, to enable you to pay off the loan completely in the remaining years. The biggest advantage of HELOC is that, it gives the borrower much lower rates of interest than what available in most unsecured credit lines. The interest on the HELOC is 100 tax-deductible. This type of borrowing is very useful in situations where cash is required due to an unexpected reason or in the case of emergencies. When you take a home equity loan, you are using your home’s equity to get a one-time lump sum amount from the loan agency. This loan amount once availed cannot be re-used and the rate of interest is fixed for the loan’s term of repayment. Taking a home equity loan is useful when you have to meet financial requirements that require a more money such as debts consolidation, home improvement or financing you education and so on.Whether you choose to take a HELOC or a home equity loan, carefully asses your financial requirements and situation to see of you can make the repayment in the coming years before you take up the loan.

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