Home Equity or Lines of Credit: Due Interest

Home equity loans and lines of credit are very similar: both rely on the value of a home and use the equity in the home as collateral. Bankers estimate that almost 40% of all home equity loans (HELs) and home equity lines of credit (HELOCs) are being used to refinance debt.

You can use the equity in your home for any reason, and paying off credit cards is one of the most popular. As long as credit card interest rates continue to go up faster than HEL or HELOC rates, the number of refinance loans may get even higher. We should know all that we can about these loans.

There is a very simple rule to remember when choosing between a line of credit and an equity loan: if you want a traditional loan for a specific purpose, then go for a home equity loan. An HEL gives a borrower the safety of knowing how much will be paid each month (assuming there is a fixed rate mortgage), and for how long he or she can expect to pay off the loan.

The line of credit loan, on the other hand, rewards people who anticipate needing some money in the near future and want to pay only exactly what they need. While this certainly can work to one’s advantage, it also presumes that borrowers will be restrained enough only to take what they need and when they need it.

Think about it this way: an HEL opens the safe once, while a HELOC gives the safe’s combination to the borrower. Once a HELOC is established, there usually is a period of time during which the equity needs to be used – use it or lose it, really. On the other hand, it usually is quite easy to renew one’s credit line. Just call the bank, survive a quick credit check, and promptly receive an answer. For consumers with excellent credit, HELOCs can be a simple approach that alleviates many worries.

Shop around before committing to a HELOC. Read the fine print – many banks will sneak maintenance fees into your agreement. Make sure to ask the banker about any fees or details, and have everything in print.

For either loan, there is great variance in state laws concerning the amount of available equity. Consequently, if a lender offers very low rates for either HELs or HELOCs, he or she may be posting the lowest possible rate in your part of the U.S. You should be aware that both types of loans may have a processing period of up to three weeks, and both will have closing costs.

HELs really are pretty simple, so we have not discussed them much here. The simplicity itself may be considered an advantage, but be sure that you know just how simple of a need you have, and your needs for the future, before committing to either an HEL or a HELOC.