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Home Equity Loans and Home Equity Lines

Mortgage Library: Home Equity Loans and Home Equity Lines

To understand the differences between the home equity loan and equity line, you should bear in mind that home equity loan is an additional (second) mortgage loan, while equity line works much like a credit card does.

Where the traditional equity loan gives the homeowner money in one lump sum, the home equity line of credit allows homeowners to obtain cash when they need and to pay interest only on the outstanding balance. So you should use an equity loan when you need all the money up front and it is more advantageous using an equity line if you have an ongoing need for money.

Unlike the home equity loan the home equity line is usually open-ended. Some home equity lines last for as long as you own your home.

Another factor to consider when choosing between home equity loans and equity lines is your monthly payment. Home equity loans usually have fixed interest rates and fixed payment amounts, while most home equity lines are of the adjustable-rate and if the interest rate goes up, so does your monthly payment.

Home equity lines are almost always tied to the prime rate plus some margin, with at least a lifetime cap on rate movements. Some home equity lines may have an introductory rate.

You may want to compare rates of home equity line with the rate on a credit card. Here is an example:

If you know that tax bracket is 30% and the rate of the equity line is 9% then your effective rate is: 9% x (1-0.3)=6.3% Now you can compare this rate with your credit card rate.

Related Articles:

How to Compare Interest Rates Among Different Lenders? Tips allowing you to make an easy and accurate comparison.
Using Equity to Your Advantage


Should I consolidate debts? How much will you save if you consolidate your existing debts with Home Equity Loan or Home Equity Line of Credit?
Should I use a home equity loan instead of an auto loan? The calculator allows to compare the costs and benefits of an auto loan and a home equity loan.

Government publications:

Home Equity Credit Lines (FTC) Lenders are offering home equity credit lines in a variety of ways. Select the home equity credit line best tailored to your needs.
Second Mortgage Financing (FTC) This brochure provides answers to some common questions about shopping for a second mortgage or home equity loan.
What You Should Know About Home Equity Lines of Credit (Board of Governors of the Federal Reserve System) The brochure explains what you should look for when shopping for a home equity line.
Getting a Loan: Your Home as Security (FTC) When you use your home as collateral for a loan, Truth in Lending Act gives you the right of rescission -- the right to cancel the credit transaction within three business days. The brochure explains details.

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