Home Equity Loan Advisor

The two types of home equity debt are home equity loans and home equity lines of credit, which are commonly referred to as HELOCs. Both types of debt are often called second mortgages because they are in addition to your primary, or first, mortgage.

Home Equity Loans

A home equity loan provides a set amount of money as a single lump sum. This is great if you are using the proceeds for a specific project, such as a house renovation. Since you will have a set repayment schedule, it can be easier to budget for repaying the loan.

However, the downside of such debt is that consumers often have the temptation of spending whatever is sitting in their bank account. Since you’ll be getting a lump sum, you’ll need to have the discipline not to spend that money unwisely.

Home Equity Line of Credit (HELOC)

A home equity line of credit, or HELOC, provides a flexible amount of money over time. As the name implies, this loan provides a line of credit that you can access whenever you need the funds. The advantage of a HELOC is that you only pay interest on the amount of money you drawn down from the loan. Another advantage is that there are often no closing costs.

The downside to HELOCs is that the interest rate is usually variable. These changes in interest can be large, drastically increasing your costs. So if you think interest rates will be going up in the future, the costs of your HELOC will be going up as well. In contrast, a home equity loan is often a fixed rate for the life of the loan.

Another downside to HELOCs is that your credit and income will be reviewed every few years to determine if you can keep the line open. If your credit score or income drops, there goes your HELOC.

At one time, HELOCs offered low teaser rates, which made them extremely attractive to consumers. However, in today’s market the rates for both types of loans are fairly similar.

Costs of Home Equity Loans vs. HELOCs

When comparing the costs of each type of loan, you have to look beyond the annual percentage rate (APR). The APR for home equity loans generally includes points and financing charges. These are often left out of the HELOC rates.

Both types of home equity debt are equally tax-advantaged. In general, interest paid on either a home equity loan or HELOC is tax deductible.

Usually you have to pay off equity debt more quickly than your first mortgage. Primary mortgages are usually set up to repaid over 30 years, whereas equity loans are commonly repaid over 15 years or even as short as 5 years. Each loan is different, so you’ll have to shop around and figure out what repayment period works best for you.