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Aaron's A to Z Garden of
Information
Do you need a home equity loan or line of credit?
What is a home equity loan and different
types of home equity loans
Do
you need a home equity loan or line of credit?
by Jakob Jelling
A home equity line of credit is very closely related to a home equity loan
but the subtle differences can mean a lot. Determining which option is the
best for you relies upon you knowing your current situation and having a
clear plan for what you wish to accomplish with the money.
A home equity loan is a lot like a mortgage. With a home equity loan you are
able to borrow the amount of your homes value that you have already paid
off. The benefits of this type of loan is that it is almost always
guaranteed since it is based upon the amount of your home that you already
own, the terms are almost identical to a mortgage and you receive the entire
amount of the loan up front after closing.
While a home equity loan is also based upon the amount of your home that you
currently own, the terms of the loan are very different. A home equity loan
is basically a credit card where the limit is the amount of equity that you
have in our home. Instead of receiving one large lump sum of cash, you will
receive an overdraft type of service on your account that will allow you to
withdraw as much or as little of the equity that you wish to use.
Which choice is better for you? The answer depends upon what you need the
money for. With a home equity loan the monthly repayment schedule is known
and the interest on your loan will be lower than most other types of loans.
However, with a home equity line of credit, you have instant access to cash
and the payments will vary depending but the interest will vary. With this
in mind the question really becomes do you need access to a varying amount
of money or one known lump sum of cash?
A lump sum of cash with a set repayment schedule is great for specific
things such as debt consolidation or the funding of specific projects with a
predetermined cost. If you are considering debt consolidation for credit
cards or any other high interest loans a home equity loan is most likely a
very good idea. You will be able to repay all of your debt and will only
have to make one monthly payment at a lower rate of interest that you are
currently paying on your cards and other unsecured loans.
Home equity loans also make perfect sense if you know the exact amount that
you need to borrow. While it is always nice to have cash on hand it is often
better to have more credit available to you. The more of your credit limit
that you use up the higher the interest rates will be for you and the
tougher it will be to borrow more money in the event of an emergency. It is
definitely to your advantage to only be in debt for a specific amount to
complete one project.
A line of credit option may be better depending upon what you wish to do
with your money. While you will still use up a portion of your credit limit,
the payments and impacts on your available credit may be lower. With a line
of credit you always have the same amount of money available to you. As you
pay off the amount of credit used, you can reuse that portion if needed
without having to apply for another loan. Also your payments may be
considerably lower since you are only paying on the amount of money that you
have actually used, not the total amount borrowed.
As you can see there are some big differences between a home equity loan and
line of credit. If you are looking at a single project, such as a new car or
adding a pool to your home, a home equity loan is the better choice for you.
However, if you are looking at starting up a new business, wish to travel or
can not settle on predetermined amount money, then a line of credit is the
better option for you. With a line of credit you can use as much of your
credit as you wish whenever you wish and, much like a credit card, you can
reuse the amount of the line of credit that you have repaid with out having
to re-apply for a loan.
Jakob Jelling may be contacted at
http://www.kitesurfingnow.com .
Jakob Jelling is the founder of
http://www.kitesurfingnow.com. Visit his kitesite for the latest on
kitesurfing equipment, kiteboarding lessons, places to surf and much more! |
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