Home Equity Line of Credit Versus Equity Loan

There are many benefits and disadvantages to both home equity lines of credit and home equity loans.  Borrowers should carefully consider the pros and cons making the selection between these home equity vehicles based on your unique needs and circumstances.

Loan Amounts Available

Both home equity loans and lines of credit allow you to borrow up to 100% of the equity in your home. In some cases, lenders will even allow you to borrow up to 100% of your home equity.  However, in today’s market 90% is typically the maximum most home equity lenders willl allow.

Qualifying Requirements

Both fixed equity loans and credit lines require you to document the following:

ü  Must have good income (keeping your debt to income ratio under 45%)

ü  Must own home already (can’t get a second mortgage without out owning a property)

ü  Your existing mortgage must be current (no delinquencies on the mortgage)

ü  Current value of the home (70-90% Combined Loan to Value).

A home equity loan rates are typically fixed rate terms for 15, 20 or 25 year terms.  Occasionally second mortgage lenders will allow borrowers to take out equity loans for up to thirty years, but they are usually in purchase money transactions. So, if you have yet to pay off at least that much of your home’s value, then your choice of which instrument to apply for is made for you.

If you wish to use the cash borrowed in a lump sum for a single, one-time expense (ie. Home remodeling, an emergency, or to consolidate credit card debt), then a home equity loan may be the better choice.