What's best for us...Home equity Loan or Line of credit?

Question

We would like to do several home improvement projects and pay off some credit cards. The HELOC option seems to be more appealing to us so we take only what we need yet getting a loan gives us the option to hold the funds in a high interest bearing savings account (4.50 APY). How do I know what is right for us?

Answer 1

Take the home equity line of credit. Since it is secured by your house, it will probably have a lower interest rate than an unsecured personal loan. Also, you only use what you need, so you pay interest on less principal. Even putting the extra funds in a high interest savings account will cost you more in the long run. Your interest rate on the loan will be higher than the interest rate on the savings account, so it will cost you more to hold the money than if you had not taken the extra out.

Hope this helps.

Answer 2

It depends on the purpose. If your need is a specific amount, you are normally better off with the loan. The reason is that, with most lenders, home equity loans charge simple interest rather than revolving interest. You will normally be quoted a lower interest rate for the line of credit, but this is deceiving. Because of the way interest is compounded on the credit line, your total interest payments will likely be less with the loan. You can easily verify this by asking the lender to calculate the payments for each to pay off the balance in a specific time frame.

The advantages to the credit line are that it is a ready source of credit available whenever you need it, and your minimum payment is normally an interest-only payment, giving you added flexibility.

Also, you may be able to get both if you need to borrow a particular amount, but also want the line available for future use.

Answer 3

Personally, I would choose a line of credit over a home equity loan. The interest might be higher, but if anything happened and you had trouble making payments (hopefully not, but anyone can get laid off or get sick, you never know), the worst that can happen with a line of credit is that it will go to a collection agency and on your credit report until you get back on your feet and can pay it off. With a Home Equity Loan, you could potentially lose your home.

Answer 4

I personally suggest the fixed rate second equity loan. It will eliminate the worry of adjusting rates that accompany the HELOC and as you stated, allows you to offset interest paid by earning interest through a savings account. It also is excellent as qualifying assets for any future borrowing.

Here is some additional info. Hope this helps.

Answer 5

I suggest cash. But if you have your heart set on a loan, read the fine print.

Line of Credits are renewable once a year and the bank could call it due in full the following year if you loose your job or rack up a ton of debt, etc. The home equity loan should be a fixed payoff time period. Read the fine print. I still suggest cash.

Answer 6

Pay off your credit cards save the money then add on with cash up front you will be allot better off in the long run.
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