A Home Equity Loan vs. A Home Equity Line of Credit

If you own a home and your home has a mailbox, the chances are good that mortgage companies have solicited you to take out a second mortgage. Companies obtain information from the county courthouse about the details of your mortgage; and because your note and your deed are available on public record, solicitors can send you information that appears to come directly from your loan company.

Home equity loans are generally available in one of two types: home equity loans (or closed end loans) and home equity lines of credit (or open ended loans). Home equity loans are disbursed in a one time payment, and the repayment can be amortized over five to thirty years with a fixed or adjustable rate. (more information about Home Equity Loan rates)

Home equity lines of credit function as a revolving credit line with access to the credit line through a credit card and/or a checkbook. Home equity lines, much like credit cards, incur daily interest based on the outstanding balance and usually have an adjustable rate based on prime rate. (more information about Home Equity Line of Credit rates)

The advantage of having either type of equity loan is that in most cases the interest paid on this type of loan is tax deductible (consult a tax professional for details). An equity line of credit can also serve as a fund to pay for property improvements or unexpected expenses. One of the disadvantages of these types of loans is that in most cases people do not use the money to improve their property, but instead deplete their equity by consolidating credit card bills and consumer debt. In addition, some mortgage companies offer loans in excess of the available equity (up to 120%) putting consumers “upside down” in the homes making it virtually impossible to sell or refinance the property.

The other factor that most consumers fail to remember is that the real tangible equity in your home is the value of your home, minus the loan amount, minus what it would cost you to sell the property. As an estimate you can use a 10% cost of selling to determine your net equity (which takes into account the cost of real estate fees, possible contribution towards a buyer's closing costs, transfer tax, pest inspection, etc.)