Home Equity Line of Credit and Home Equity Loan

The Home Equity Line of Credit (HELOC) is an open-ended credit line secured by a second deed to your house. This allows you to borrow against the equity of your home. You can take out as much as is allowed on the credit line, which works just like a credit card. You can either pay it down or make the minimum payment; interest is calculated monthly. A Home Equity Loan is a second mortgage against your house. In contrast with a HELOC, you receive the amount at once and pay interest on the entire amount.

Advantages of a HELOC or Home Equity Loan

• They generally have lower interest rates than unsecured debt such as credit cards, a business line of credit, or SBA secured loans. A home equity line is perhaps the cheapest method of financing.
• You may be able deduct the interest you pay on a HELOC or Home Equity Loan on your tax returns.

Disadvantages of a HELOC or Home Equity Loan

• Your home is pledged as collateral. You can lose your home if you default on payments.
• If you sell your home before paying for the home equity loan or the HELOC against your property, you will realize a smaller profit from the sale of your home. This is because you are borrowing against your accrued equity.
• Home equity lines may impose fees for closing your account too quickly after opening it.

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