Home Equity Line of Credit (HELOC)

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Home Equity Loan / Home Equity Line of Credit

Mortgage loans on a primary residence are the least expensive form of borrowing for most consumers. When the value of your home exceeds the amount you owe, you have equity in your home. There are generally two reasons you might consider taking a home equity loan:

to make improvements that increase the value of your home; or
to pay off higher interest rate debt you have accumulated, usually from credit cards, and consolidate it to make one payment at a lower interest rate.

As with most things in life, there are pros and cons to obtaining a home equity loan to consolidate debt.

The positives include the convenience of making one bill payment instead of multiple payments; securing a lower interest rate which equates to savings in the long run, and the ability to claim a tax deduction for the interest paid on your home equity loan which is not permitted for credit card interest. These potential benefits will be offset should you use your newly available credit card limits to charge up new debt, which could put you at risk for not being able to meet your payment obligations on your home equity loan.

There are other considerations to think about before applying for a home equity loan to be confident it's a good financial decision. These include whether or not your lender will require you to pay for Private Mortgage Insurance (PMI) with the addition of this loan, which will decrease your total savings. Additionally, the repayment term you select for your home equity loan versus what interest you would pay at a shorter pay-off term for your existing credit card balances needs to be considered. For example, paying off a 15-year home equity loan at 7.25 percent interest may not result in real savings versus paying monthly credit card payments at 11 percent interest for five years.

Home Equity Line of Credit (HELOC)

As an alternative to a home equity loan, most lenders offer the opportunity to apply for a home equity line of credit (HELOC). Both types of financing allow you to get cash out of the equity you have built up in your home. A home equity loan is a fixed amount that you borrow and make payments on for a set period of time, generally any length from three to fifteen years. A home equity line of credit is like a bank account where you can write checks based on the equity available in your home. There is no set repayment period and you can continually borrow against it (up to the approved limit set by the lending institution), much like with a credit card, with the added advantage of being able to deduct your home equity line of credit interest on your tax return. You can pay off your home equity line of credit and continue to borrow against the line without having to take out another loan.

LendingLeaders will match you with lenders who will work with you to help decide what mortgage options are right for your situation. To have one of our lenders contact you, simply fill out the quick, no obligation loan form by clicking here.