Your home equity is the
difference between what you owe on your mortgage (and on any other home
loans) and the market value of your home. You build equity as
that difference grows when you repay mortgage principal to decrease
the amount you owe, or when your home's value increases.
You
can borrow against that equity when you need cash, using either a home
equity loan or a line of credit. Both offer a number of
advantages over other types of financing, including:
- Interest savings. Home equity loans and lines
typically have much lower interest rates than other types of financing,
such as credit cards and personal loans.
- Tax benefits. Just like your first mortgage, the
interest you pay on a home equity loan or line is usually
tax-deductible. Consult your tax advisor about the deductibility of
interest.
Comparing Home Equity Loans and Credit Lines
| |
Home Equity Loan |
Home Equity Line of Credit |
|
What you get |
A single lump-sum payment for the full loan amount |
A revolving source of cash that you can draw from as needed |
|
How you use it |
To finance large one-time expenses that have a definite cost |
To finance ongoing expenses or miscellaneous purchases, like you would use a credit card |
|
How you pay it back |
Repay the full loan amount over a specific time period, at a fixed interest rate |
Make payments on the outstanding balance, at a variable interest rate |
|
Benefits |
It offers simple repayment terms, and the security of knowing your payments will never increase. |
It's there when you need it, and you only make payments on what you use. |
