Home Equity Loan Line
of Credit Vs. Other Conventional Loans
By: John Ross
When it comes to getting money,
you have two basic options. If you are a homeowner you can choose to take out
a home equity line or credit (HELOC), or you can take out a conventional loan.
Both of these products will provide you with the funds needed, but the similarities
end there. With varying interest rates and repayment options, you have a wide
array of choices. We will discuss the differences between these two options, and
then decide on which one is best for the typical homeowner. Remember, that everyone's
situation is different, so use your best judgment when choosing a loan product.
You may already be familiar
with a traditional loan product. These are usually based on your credit rating
and your ability to repay the loan. The lender will review your past tax returns,
credit score, as well as your salary. They may also factor in your income potential
in the near future, if you are currently enrolled in a higher education program
or up for a promotion soon. The main benefit of such a loan is that you have little
at stake if you fail to repay the loan. They may have the ability to garnish your
wages or hurt your credit rating, but you will be able to keep your home. The
main disadvantage to this type of loan is that you can expect to pay a much higher
interest rate than that of a home equity loan. You may also find yourself unable
to take out as much as you would with a HELOC.
A Home Equity Line of Credit is a completely different time of loan. The bank
will determine the amount of equity that you currently have in your home (value
of the home- amount of liens= equity). They will then allow you a credit line
that is a percentage of your equity. You will likely receive checks or a bank
card that will allow you to make withdrawals on your own schedule. You can borrow
as little, or as much as you want as long as it is within your credit limit. You
will then make monthly payments based on the balance of the loan. Most lines of
credit will require a minimum payment to cover interest, but the actual payment
amount is up to you. The process is very similar to that of a regular credit card,
except that you have your home backing up your purchases. The main advantage to
this type of loan is that you can usually enjoy a much lower interest rate, and
pay as much or as little during the life of the loan. The main disadvantage is
that if you fail to pay the balance off, you could lose your home. So it is important
to only take out what you can repay.
Which one is better? It all depends on your personal situation. If you have had
trouble in the past with credit cards and revolving credit, a HELOC could be a
very dangerous thing. Maxing out your HELOC has a lot more at stake than maxing
out a typical credit card. So it is important that you have your finances and
budget in place, prior to taking out such a loan. If your credit is poor, a HELOC
may give you options where a traditional loan would not. Bottom line; understand
your situation and you should have no trouble deciding the right loan product
for your needs.
About the author:
John Ross is a freelance author, providing tips and ideas relating to home equity
loans. You can find more of his articles at: home
equity loan company, online
home equity loans, and fixed
rate home equity loan. The Loanchbox is a user friendly website designed
to teach the basics behind home equity loans.
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