If you are in a tight financial situation and you need extra funds to pay off other obligations or necessities, then a home equity loan might be your best option. There are two types of home equity loans, one of which is the second mortgage and the other is the home equity line of credit. Before applying to either one it is important to know home equity loans vs home equity line of credit and what the similarities and differences are between them.
Home Equity Loans (HEL)
A home equity loan, also known as a second mortgage, is simply a loan that your bank issues to you that is borrowed against your home’s equity. Interest begins accruing as soon as the bank issues the money. Low interest home equity loans are typically used for specific purposes like paying off credit card debt, student loans, medical bills or other obligations.
What makes these types of loans attractive to borrowers are that the interest rate and monthly payments are fixed which are then paid back over a fixed period of time. These payments are generally made over a period of 10-15 years depending on the payment plan you choose.
Home Equity Line of Credit (HELOC)
A home equity line of credit is similar to a credit card in which the bank issues you a revolving line of credit for which you make monthly payments only on the borrowed amount. Like a credit card, interest only begins accruing when purchases are made. The rate for which you can get a home equity line of credit depends on your credit and your ability to pay back the loan.
These types of loans are best for when you do not need all the money all upfront but need an additional line of credit to pay for other expenses. The downside of these loans is that the interest rate is variable which is usually similar to the current prime rate.
Paying The Loan Back
One of the most common options to pay a home equity loan back is to make regular monthly payments that pay down the interest and principal. There are also other available options with some loans allowing you to pay interest at the beginning while gradually more of the principal as more payments are made.
Another option that may be available is the option to pay off both the interest and principal at the same time. However, while this option might seem like the best choice it may require you to make extra payments which may or not may be feasible depending on your financial ability. Be sure to check with your lender for more payment options.
An added benefit that many people do not take advantage of is that the interest that you pay on your home equity loan may allow you to make tax deductions. However, the interest rate that you get on a home equity loan is typically higher than that of a first mortgage but the tax write off can help save you money.
One of the main reasons that people get a home equity loan is so they can use it to pay off obligations like credit card debt, medical bills, student loans, etc. However, it’s extremely easy for people with bad spending habits to run up their credit cards again leading them to even more debt. Be sure that if you decide to get a home equity loan that you properly manage your finances and budget accordingly.
Getting a home equity loan can allow you to use the additional funds to pay off obligations like credit card debt, student loans, medical bills and more. Doing so can help to significantly relieve any financial burdens but it is also important that you always speak with a financial advisor to help you decide whether the home equity loan or the home equity line of credit is right for you. Speaking with a financial counselor will also allow you to further analyze home equity loans vs home equity line of credit.