Home Equity Loan or Home Equity Line of Credit?

Home Equity Loan or Home Equity Line of Credit?

The most popular type of home equity loan is the term loan. This loan is set for a fixed period of time, usually between 5 and 15 years. Such loans are typically granted for up to 80% of the value of the home, but some lenders will offer you up to 125% of the home's value.

Term loan is a good choice when you need a certain amount of money for a specific purpose, like paying for a wedding, a home remodeling project, a fixed educational expense, or debt consolidation. It has a fixed repayment schedule, which means that a borrower will pay a fixed amount of money each month for a certain period of time.

However, there is an alternative to the term loan - the home equity line of credit. This type of loan works like a credit card, and has a revolving line of credit, in which the borrower may borrow against the principal more than once over the life of the loan. The borrower is usually given special checks that he or she may use to write checks against the loan amount. The borrower may borrow a little at a time, or borrow all of the loan amount at once. Unlike the term loan, the interest rate on lines of credit can vary. This type of loan works best for recurring expense, e.g. a complicated remodeling project accomplished in several stages, or a recurring educational expense such as annual tuition.

Both types of home equity loans have their advantages and disadvantages. The decision on which one is the best for you must be based on your current situation and your needs. Think, whether you want to make stable and regular payments or prefer flexibility of the credit line.

Either way, under current Federal law, the interest on a second mortgage is deductible from your income taxes up to $100,000.

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