Home Equity Loan Or Equity Line Of Credit? by Art Gib

Perhaps you've always wanted to remodel that old kitchen but never had the cash to do it. Perhaps you need funds to finance your daughter's college education but you're not sure where to find them. The answer may be to tap into your home's equity either through a home equity loan or equity line of credit. Here's how to know which to choose.

First of all, obtaining any kind of loan against your house should never be taken lightly. The equity that you have invested in your house isn't truly yours until you have paid off your mortgage, and by borrowing this money you must know that it still must be repaid because you are borrowing from your lender.

It may be tempting to use funds from your home's equity to finance a vacation or buy a boat, but these are frivolous uses of your precious equity. Any loans against your home's equity are better used for important things: save your money separately for that vacation to Tahiti.

What is a home equity loan and what should it be used for?

A home equity loan is set up in monthly installments, much like your mortgage is. You are given a specific sum of money all at once to use as you will, then make regular payments plus interest on that loan until it is paid back. The interest rates and payment schedule for home equity loans are generally fixed and the funds are repaid over a predetermined length of time.

A home equity loan is best used for a project where the homeowner has a measurable means of accounting for how much the cost will be. For example, if you have already had a professional contractor come in and give you a bid on that new kitchen remodel, you may know that you will have to borrow at least $11,678 based on the contractor's estimate. You may wish to borrow $13,000 to account for any unforeseen expenses. You may then repay that amount over a period of, say, five years.

If you need to fund your daughter's college education, you will already have a pretty good idea of how much that will cost based on where she has been accepted. Both a home improvement project and a child's education are wise uses of a home equity loan.

What is a home equity line of credit and what should it be used for?

A home equity line of credit is basically another credit card (without the card) and you can borrow up to a certain limit against your home's equity. Unlike a home loan, a line of credit is open-ended in terms of time: as long as you keep paying it down, you can keep borrowing. The payments on an equity line are not necessarily set on a fixed schedule, and the interest rates are variable and tied to the prime rate.

Because of the variable rate, it is best to use the home equity line sparingly: it is ideal for use in case of home emergencies (having to replace a faulty furnace, for example) or to cover an unexpected bill or other unforeseen expense.

If you are a New England resident interested in learning more about home equity loans and equity lines of credit, contact the professionals in ma banking: Workers Credit Union (http://www.wcu.com). Art Gib is a freelance writer.

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