Home Equity Loan or Line? The Inside Scoop.
—By Scott Boyles, Chief Lending Officer
People have been using the equity in their home as a source of funding for years, and for many reasons. For some, it’s to pay down high interest credit cards. Others need to pay for a child’s college education or want to renovate a portion, or all, of their home.
The nice thing about home equity is it’s yours—and you can use it how you see fit. However, many times, what you want to borrow for will determine how you should borrow—a home equity loan or a home equity line of credit.
Both options use the equity in your home to provide you funds, but the logistics of each are different. A home equity loan is essentially a second mortgage. You receive a lump sum that you pay back over a set period of time that is determined between you and the bank. The interest rate on these loans remains constant—or is locked-in when the loan is funded so you don’t have to worry about rates going up and down.
Alternatively, a home equity line of credit works more like a credit card. You receive a fixed amount over a period of time, and you only pay back the money that you use, plus interest. For example, if you have a home equity line of credit for $20,000 and you borrow $2,000, you need to pay back only the $2,000 plus interest and you still have $18,000 available for you if you need it.
HELOCs are typically variable rate loans, so the interest rate will fluctuate with the market. Rates on HELOCs are usually lower than other types of borrowing. The advantage of a HELOC is you don’t utilize the credit unless you need it. Because of this many home owners use a HELOC as an emergency fund, quick cash, or as a way to provide flexibility to their financing options.
The nice thing about a HELOC is it gives you the freedom to decide how much you need when you need it. People utilize this funding option for many different reasons including home improvement, debt consolidation or funding a higher education—but it can also be used to buy a car, purchase a boat or take your family on vacation.
Plus, depending on what you use your HELOC funds for, you may be able to claim eligible expenses as itemized deductions on your federal income tax return. Please consult your tax accountant to see if your expenses qualify.
Life happens to all of us, and sometimes, you just need a little extra to get you through. Whether it’s a planned expense or an unexpected one, if you have equity in your home, it can sure come in handy. Like any financial decision, it’s important to know your options and determine what’s best for you. After all, what you buy and how you buy it is completely in your hands.