Home Equity Lines of Credit vs. Home Equity Loans

By Sheryl Landrum
LoanPage.com Columnist

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Homeowners looking for cash often use their home's equity by taking a second mortgage instead of refinancing their first mortgage. There are two low cost second mortgage products available--a home equity line of credit and a home equity loan. Here's what you should know about them.

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A home equity line of credit (HELOC) is an interest only second mortgage with an interest rate based on the Federal prime rate. Borrowers receive an interest rate slightly higher, or lower, depending on their credit scores, combined loan to value, and level of income documentation. The benefit of a home equity line of credit is that it acts like a revolving credit card; in other words, you only pay interest on the amount you draw against the amount available. A drawback, or a benefit, is that the interest fluctuates depending on the prime rate. Payment on this second mortgage is interest-only for 10 years and then becomes fully amortized for the next twenty. To become competitive with home equity loans, most lenders will allow you to fix the interest rate for some or all of what you owe.

A home equity loan second mortgage is for those who like to budget and have consistency. Home equity loans are fixed rate mortgages, amortized over thirty years and due in fifteen years. The starting interest rate is generally lower than a home equity line of credit and the payment doesn't change -- which many borrowers appreciate. The qualifying interest rate depends on the same criteria as the home equity line.

Talk to your loan officer or financial advisor today to determine the best new home loan for you.

About the Author
Sheryl Landrum is a Senior Loan Officer with Charter Funding, Inc. in Carlsbad, California and a freelance writer on mortgage issues.

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