Compare Home Equity Loan

When the consumer gets ready to compare home equity loan features to those of a home equity line of credit (HELOC), it is apparent that initially both loan products look quite similar. Approval of a loan application is contingent on the home’s fair market value being above the outstanding balance of the current mortgage. The gap that exists between the assessed value of the home and the outstanding loans that are encumbering the property is the amount of equity. A homeowner who is ‘upside down’ in the mortgage – she owes more on the home than it is actually worth in current market conditions – does not qualify for either of these loan products.

Although quite similar initially, this is also where the similarities between the loan products end. Compare home equity loan products to one another, and the most obvious feature that virtually all of them offer is the lump sum settlement the borrower receives at closing. An equity loan can only be made for a fixed amount; once it is paid out, it cannot be extended or changed. In fact, it adds a second mortgage loan to the home. Compare home equity loan details such as these to a HELOC, which merely opens up a line of credit in keeping with the amount of equity available, and it is evident that the latter offers quite a bit of flexibility.

As the borrower takes out equity money, the available funds decrease. As she repays the loan, they increase again. A homeowner who wants to ward off potential problems associated with short term money worries, or who wants to have emergency cash ready without having to rely on credit cards, should compare home equity loan and HELOC interest rates to those of other credit products. She may find that those products tapping the equity are most likely also the more cost-effective ways of paying for the major car repair bill and repaying it slowly over a number of months. Of course, a homeowner who needs a bigger chunk of money right away – usually because of a big expenditure, such as sizable home improvements – generally finds little advantage to a HELOC and instead may wish to go straight for an equity loan.