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Home Equity Loan vs. Line of Credit

If you are considering a second mortgage, which option is best for you?

Home Equity Loan

A Home Equity Loan is delivered to the borrower in one lump sum at one time, often with a fixed interest rate. This is very similar to a regular mortgage or auto loan. You get a specific amount and have to pay it back according to a set schedule. Home Equity Loans are usually the best choice when you know how much you need and want the ability to pay over a long period of time. They are 15 years at a fixed rate.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit (HELOC) is a line of revolving credit with an adjustable interest rate, great for short-term borrowing or unexpected costs such as a medical emergency. The borrower can choose when and how often to borrow money. GTE Financial will set a preliminary limit to the credit line, possibly giving the borrower access to up to 90% of the value of their home depending on credit history, less any liens. HELOCs have sometimes been compared to credit cards, in that you’re given a limit. Paying off your debt will then free up more credit. However, there is a term for the loan, and during that term, you have a “draw” period where you can borrow as much as you want from your credit limit. Just like a credit card, you pay interest on the amount you borrow. The draw period is five years and you have fifteen years to repay it.

Loan Comparison Chart

Home Equity Loan

Advantages: Home Equity Loan

  • Interest rates are locked in over the life of the loan for most Home Equity Loans. Homeowners don’t have to worry about unexpected rises in their Annual Percentage Rate.
  • Since a Home Equity Loan is a one-time, lump sum, some homeowners may find it easier to avoid additional debt versus a HELOC where you can continuously draw down money from the loan.

Good Choice If:

  • You prefer fixed monthly payments that won’t change.
  • A longer loan term is necessary.

Disadvantages: Home Equity Loan

  • Since Home Equity Loans are usually Fixed Rate loans, if interest rates fall, the borrower will end up paying more in interest versus a HELOC which usually uses a variable rate that adjusts downward.
  • Since the life of the loan is longer, for example 15 years, you end up paying more in interest.
  • You only receive money one time, so if additional costs arise, the borrower would need to apply for a new loan or consider refinancing.

Home Equity Line of Credit

Advantages: HELOC

  • If you don’t know for sure how much money you will need over a period of time, a HELOC allows the borrower to take advances as they need. As you pay it back, it frees up more credit.

Good Choice If:

  • A lower Annual Percentage Rate is more important than the possibility of an increase in your monthly mortgage payment.
  • It is uncertain how much money you will need to borrow and when.

Disadvantages: HELOC

  • A borrower will not have the security of locked in payments. As rates change, so will the monthly payment.
  • A HELOC has a shorter loan length which will require faster payment.

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