Home equity
alter natives
IF YOU’RE A HOMEOWNER, you can borrow against the value of your
house through either a home equity line of credit (often called a HELOC or
a line) or a home equity loan (often called a HEL or loan). Both are essentially
a second mortgage.
Generally, a HELOC is a good choice to meet ongoing cash needs, such
as college tuition payments or medical bills. A HEL is more suitable when
you need money for a specific, one-time purpose, such as buying a car or a
major renovation.
Here’s a comparison of the two.
Home Equity Line of Credit (HELOC) Home Equity Loan (HEL)
What
you get
Revolving credit with a specific credit
limit of up to 100 percent of the
value of a home (its value minus all
debts against it). Some lenders allow
borrowing up to 125 percent of the
value of a home.
A fixed amount of money up to 100
percent of the equity in a home (its
value minus your first-mortgage debt
and other debts). Some lenders allow
borrowing up to 125 percent of the
value of a home.
How to
qualify
Provide proof of income, home
ownership, mortgage and amount
of equity in the home. An appraisal
is usually required.
Provide proof of income, home
ownership and that at least
20 percent of the value of the home
is paid off. An appraisal is usually
required.
How you
repay it
Minimum payments (as little as
interest only) each month; eventually
the entire sum borrowed plus interest
is repaid.
Fixed payments of interest and
principal over a fixed period of time.
How long
it lasts
You have a 10- to 20-year period
when you can draw on the line (up
to the credit limit), after which you
have a fixed period to pay off the
outstanding balance plus interest.
The term of the mortgage can be
as short as a year or as long as
30 years.
Costs
and fees
Usually no closing costs, but may
have an annual fee.
Closing costs that are lower than
for a first mortgage.
How you
receive
the money
Draw funds as needed using
special checks or a credit card.
Receive one up-front lump sum.
