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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.
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