Choosing Between a Home Equity
Loan or Line

By Ron Sibley
President, Community Guaranty Savings Bank

Home equity loans or home equity lines offer you the opportunity to borrow on the equity in your home. Usually, the longer you have been paying a mortgage, the more equity you may have built up. Using that equity for home improvement, college tuition, medical bills, debt consolidation, or simply as a cash reserve for unfor seen expenses, is sound thinking. In most cases, the interest rate is lower than on personal loans or credit cards and the interest is generally tax-deductible but you’ll need to check with a financial advisor. Financial institutions differ on how much you can borrow but there are some general guidelines.

The question is; which one do you apply for? Your banker is certainly a good person to talk to. He or she can advise you, based on your needs and your financial situation. But it’s good to know the difference between a home equity loan and a home equity line.

If you have a specific need, such as college tuition, a home improvement project or debt consolidation, a home equity loan might be the right choice. It may offer a fixed rate of interest for the life of the loan (and right now interest rates on home equity loans are still low). It allows qualified applicants to borrow, in some cases up to 80% or more, of the appraised value of their home over a fixed number of years. The interest rate may be fixed over the life of the loan.

There will be some closing costs and possibly points and an appli cation fee, all of which must be disclosed in the application process. Most home equity loans have no prepayment penalties but it’s always wise to check before you sign on the dotted line

The home equity line allows you to handle unforeseen expenses that come along, take a special vacation, make improvements to your home, etc. It is a revolving line of credit over a fixed number of years, usually five or ten, but the number of years varies with each financial institution’s home equity products. At the end of the term you can pay off the amount owed or begin a repayment process over a fixed number of years. It’s really a flexible money management account that offers you financial protection. You can draw on it when you need it and pay it down when you don’t.

A home equity line usually allows you to borrow up to 80% of the value of your home minus the balance on your mortgage. There are a few closing costs and, depending on the financial institution, an annual fee and/or an application fee. Once the credit line is established and the line is set up, you may access your line of credit, usually by writing a check (checks are provided). Once you begin using, or drawing, on your line of credit you often have the option of paying principal and interest or choosing to pay interest only. The interest rate is usually based on the prime rate index and changes when the prime rate changes. Rates are still low on home equity lines but keep in mind that they are generally tied to the prime rate and can go up or down.