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Home Equity Line of Credit

If your home has a significant amount of equity, you may want to consider a home equity line of credit. A home equity line of credit gives you access to credit that can be used to pay your everyday expenses. You also may use a home equity line of credit to consolidate your credit card and medical bills into one payment.

How will a home equity line of credit benefit you?

A home equity line of credit may be a good option for you if you pay recurring bills. The interest on a home equity line of credit often is tax deductible.

Does your monthly payment include principal and interest?

Some home equity lines of credit require that your monthly payment include principal and interest, while others are interest-only loans. As the interest rates on most home equity lines of credit vary based on the prime interest rate, which is the interest rate that banks charge clients, your monthly payment may change from month to month.

Is a home equity line of credit the same as a second mortgage?

A second mortgage allows you to receive the full loan amount in a lump sum, and the payments you make will be applied to the total amount of funds that you received. A home equity line of credit may be referred to as a second mortgage, but there are differences.

  • Home equity line of credit - You can borrow as much money as you need at one time, until you have borrowed the maximum amount allowed by the lender. Monthly payments are determined bythe amount you borrow.
    • Example: If your home equity line of credit total is $50,000, you can write checks or withdraw funds in any increment until you have reached the cap of $50,000. If you have only withdrawn $10,000, you only will pay interest, depending on the terms of your loan, based on that amount.
  • Second mortgage - You only have access to the amount of money that you have borrowed. A second mortgage may have a higher interest rate than a home equity line of credit.
    • Example: If your second mortgage is $50,000, you will receive the entire $50,000 in one lump sum and make interest and principal payments, depending on the terms of your loan, based on that amount.

What should you consider when thinking about obtaining a home equity line of credit?

When applying for a home equity line of credit or a second mortgage, it is important to factor in the following:

  • Closing costs
  • Appraisal costs
  • Application fees
  • Points
  • Transaction fees
  • Annual fees

These fees can quickly add up. They also can cause you to have negative equity in your home. The interest rate on your home equity line of credit will vary from month to month, depending on the prime interest rate, which can make it difficult for you to budget. Your lender also has the right to reduce the amount of your unused credit at any time.