So rather than hint around at what a home equity loan or home equity line of credit can offer you (like those many pieces of junk mail youâll soon start receiving â if you havenât already), Iâm going to spell it out in plain English. So if and when the time comes for you to get one, youâll know exactly which product to choose.
Home Equity Loan
Weâve all heard the phrase âsecond mortgageâ â and thatâs a home equity loan.
Simply put, a home equity loan acts like a conventional bank loan that uses your home as collateral. It allows you to tap into your homeâs equity (the difference between the value of your home and the amount you still owe) and borrow up to that amount. And the money can be used for anything from major purchases to help with the down payment on a new house.
There are also some benefits of going with a home equity loan rather than a conventional bank loan.
⢠These types of loans offer some of the lowest interest rates available.
⢠The interest you pay on this type of loan is usually tax-deductible.
On the downside, if you default on a home equity loan, the lender can take possession of your home.
Home Equity Line of Credit
The main difference between a home equity loan and a home equity line of credit is that while the loan is for a fixed amount, a home equity line of credit is a form of revolving credit that, again, uses your house as collateral.
Based on the equity in your home, you can access as much or as little of your approved credit as you need at any time â and you can request an increase in your line of credit as your needs change.
Of course, because your home equity line of credit uses your home as collateral, if you default on your loan, there are serious consequences to be paid. But when it comes to flexible spending, thereâs no better option.
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