Tuesday, July 24, 2012

How to Rationalize Your Decision in Choosing Home Equity Line of Credit

In this time of economic uncertainty, financial insecurity is the biggest concern and in case of any crisis, a decision is made to borrow against your biggest asset you most likely own, your home and thus requires critical thinking. Many home owners take out a home equity line of credit (HELOC) to cash on their home equity value and choose between home equity line of credit and home equity loan. We will try to weigh few factors which will help you to understand and rationalize your decision in choosing between the two.

Home equity line of credit is a revolving credit in which your home serves as collateral. With a home equity line you will be given an approval for a specific amount of credit, in many ways similar to your credit card. Lenders usually determine the credit limit on the home equity line by taking a percentage of appraised value and then deducting from that appraised value the amount owed on the existing mortgage.

In determining your actual credit limit, the lender will also consider your ability to repay the loan by looking at your income, debts, and other financial obligations as well as your credit history. These funds can be borrowed as and when you need it, with the requirement of paying back the amount you utilized along with the interest. You will have a minimum monthly payment requirement and beyond the minimum, it is up to you how much to pay and when to pay.

In contrast to HELOC, home equity credit loan is like second mortgage except that it is offered for a short term. A relatively large amount of money is issued with an agreement to pay it according to fixed amortization schedule that is set at closing of the life of the loan and has a fixed interest rate. Lenders are more liberal as they view home equity loans relatively safe as any defaults on your loan the lender has a good chance of collecting your collateral. You are more likely to make this payment your priority as your home is on the line.

As we can see that both are secured on your home, it is differentiated on the basis of payment method. Furthermore, when you choose home equity loan, once paid you can no longer borrow from the loan. On the other hand, with home equity line you have the advantage of using the loan again once you have paid within the term of your credit. But both give you some tax benefits which are not available with any other type of loan.

To sum it all up, consider the below mentioned criteria before you choose between the HELOC and home equity loan (HEL). Certainty or flexibility is more important, if you are looking for certainty home equity loan may be the way to go as you borrow a specific amount of money for a specific period of time at a specific rate of interest while with a HELOC loan you borrow funds on an irregular schedule that meets your needs at adjustable interest rates that can change quickly. Loan repayment is also flexible. Use home equity loans for some of life's larger expenses like for example education or finance for the purchase of a second house etc. while HELOC is used for short term need like to pay off debts, home renovation etc.

Whichever home equity option you choose, it is important to research and understand how you can add value to your money.]

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