So, you’ve decided to add an addition, pay tuition expense, or have a cushion for life’s unexpected expenses. As your home is one of your greatest assets, many people decide to borrow against the equity in their home by obtaining a Home Equity Loan or a Home Equity Line of Credit. The tough decision is deciding which product will best suit your situation.
When working through the decision of whether to obtain a Home Equity Loan or a Home Equity Line of Credit, there are 4 categories to consider: Access to Funds, Interest Rates, Monthly Payments, and Potential Tax Savings*. By understanding each feature you’ll be well positioned to decide between a Home Equity Loan or a Home Equity Line of Credit.
Access to Funds
Home Equity Lines of Credit are great when you need to access the funds in various increments or need a revolving credit line to pay expense as they occur. With a credit line, you are free to make advances just like you are with a credit card, up to your credit limit within the terms of the agreement.
With a Home Equity Loan, the full loan amount is disbursed in one lump sum, much like a car loan. This is great when you need a set amount and don’t need reoccurring access to the loan.
For the most part, interest rates tied to Home Equity Lines of Credit tend to be variable, tied to the Wall Street Journal Prime Rate. With a variable rate loan, you get to take advantage of current market rates as they shift throughout time.
Home Equity Loans tend to be fixed rate loans, where the interest rate established at settlement will be the rate you assume for the duration of the loan.
Home Equity Lines of Credit are typically interest only for a portion of the term. This means you have the option to pay interest only each month or make additional principle payments as you see fit.
Home Equity Loans generally bill for principle and interest each month. You’ll never have to guess what your payment will be as it will be fixed for the duration of your term.
I would advise you to discuss this with your tax advisor but given your individual circumstance, the interest paid towards either a Home Equity Loan or Home Equity Line of Credit may be tax deductible at the end of the year. As this applies to both Home Equity Loans and Home Equity Lines of Credit evenly, this shouldn’t be a deciding point in your choice between either product.
In short, if you’re looking for flexibility, a Home Equity Line of Credit might be the best product to suit your needs. If you prefer stability, you may want to narrow your search to a Home Equity Loan.
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*Please consult your tax advisor.