Home Equity Loans vs Home Equity Line of

Home Equity Loans vs. Home Equity Line of Credit Expert Systems and Decision Support By: William H Shorter III

What is Home Equity? • The market value of a homeowner’s unencumbered interest in their real property – or the difference between the home’s fair market value and the outstanding balance of all liens on the property. • Your home’s appraised value – what you owe

Calculating Loan Offer / Credit Limit • Every bank or lender will vary on the amount that they are willing to give • Bank of America offers up to 85% of the value of your home minus what you still owe on the home • Lenders will often look at your credit score and history, employment history, monthly income and monthly debts which can affect the amount they are willing to give

Home Equity Loan • Fixed Interest Rate • Typically has a higher interest rate than a HELOC • Borrow the full amount all at one time • Good option for households with strict monthly budgets • Essentially a second mortgage

Home Equity Loan Cont. • Repay both principle and interest monthly • Interest is usually tax deductible for loan amounts up to $100, 000 • Cannot borrow additional funds • Plans for repayment are offered typically anywhere from 5 to 30 years • Banks will charge various fees for the application and set up of the loan

HELOC • A home equity line of credit is often referred to as a HELOC • Variable interest rate (usually lower than home equity loan) • It may be possible to fix the interest rate after money is withdrawn • Works like a credit card • Good for pay-as-you-go situations

HELOC Cont. • Use a HELOC if the amount you need is unclear • Three major considerations when dealing with HELOCS are: 1. The interest rate could rise, increasing interest payments 2. The lender may offer a fixed rate for portions of what has been taken out 3. Most HELOCS provide interest only payment options during the draw period

HELOC Cont. • The draw period is the period in which you can take money out of your account (usually lasts 10 years) • Once the draw period is over, the repayment period begins which usually lasts for a period of 15 years.

Which is better? • The choice between a Home Equity Loan and a Home Equity Line of credit is rarely black and white. • Most would suggest that If you have a set dollar figure for how much you need, to go with the Home Equity Loan since it’s a lower risk.