Home Equity Loan or a Home Equity Line of Credit?
Written by: Syd Johnson
A home equity loan is good for items that require one large payment. This is why so many consumers use it for debt consolidation. The interest rates on home equity loans are low enough to be beat out the prevailing rates on almost every other type of consumer debt. In this era of teaser rates, it is safe to say that no one is safe when it comes to long term debt.
Financial institutions are constantly updating their rules to penalize customers based on their behavior even if they have great credit. One late payment or an over-the-limit fee can take you from a 3.9% interest rate to over 19%. It is no wonder that more consumers are willing to use a home equity loan to manage their finances. It is an easy, accessible, low cost option.
However, usually, once you get a home equity loan, you must pay off the amount before you bank will consider you for another loan. It is easy to see why this would be the case. A home equity loan decreases your available equity, increases your debt obligation to your lender, and is usually a sign that your monthly bills are getting beyond your control. Once you've been approved for your loan, it puts you in a less than ideal position as a potential borrower.
Home Equity Line of Credit is revolving so it can cover expenses over and over again.
A home equity line of credit functions as a revolving credit line that is always open in case you need fast access to some cash. It operates just like a credit card in the sense that the limit is finite, interest rate is applied only when you have an unpaid balance, and any amount you take out reduces the total remaining balance.
If you have a credit line of $30,000 and you use $12,000, then you pay interest on the $12,000 and you have a remaining balance of $18,000 available at any time.
Home Equity Line of credit is great for emergencies
If you should experience a sudden job loss, an accident, or any other type of emergency where your salary is in jeopardy but you will need a loan, you can still have access to your home equity line of credit. It does not require a new loan application and can give you the same great rates as a home equity loan.
The interest rate on your credit line will vary based on the amount that you have used and the credit terms established by your lender.
So how do you decide which one is better?
Take an objective look at your finances. If it looks like you need a one time loan to reduce your debt, then a home equity loan is a good choice. If it looks like your will have periods where you will need more cash that you an get on your credit card, then a home equity line of credit might be your best option.
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