Oct 142015

Home Equity Loan vs Home Equity Line of Credit: Pros and Cons

Posted on October 14, 2015 Uncategorized

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As times periodically get tighter, your family and bills cannot wait. Temptation may have you considering utilizing your largest asset: the family home. Home repair issues, credit card debt and even college tuition can be resolved by tapping into the equity of your house.

With the fed maintaining low interest for a while now, the cost of borrowing money is as good as it gets. One key difference between home equity products and other forms of consumer debt is that all of the interest that you pay may be eligible for tax-deduction.1

A home equity loan will get you a one-time lump sum of money usually at a fixed rate of interest. A home equity line of credit is similar to a credit card allowing you to withdrawal as needed and offers an interest rate that moves with the associated rate index.

Before you decide which tool to use, let’s examine the differences between a home equity loan and a home equity line of credit. Here’s a breakdown of the pros and cons of these available instruments.

Home Equity Loans: Also commonly referred to as a second mortgage

PRO: Tax deductible interest payments available1
PRO: Fixed interest rate
CON: Pulling out all of the equity in your home at once can work against you if values in your housing market drop

Home Equity Line of Credit: Also Known as a HELOC

PRO: Pay only the interest on the amount that you use, instead of the total amount advanced.
PRO: Tax deductible interest payments available1
PRO: Interest plus 5% of outstanding principal balance advanced during the draw period provide greater flexibility.
CON: Without self-discipline, it is possible to overspend. Pulling out the equity in your home can leave you facing greater principal and interest payment amounts during the repayment phase
CON: Increases in interest rates can lead to an increase in your payments

If one of these loans interest you, contact us for a personalized tour of what Polam Federal Credit Union can do for you. www.PolamFCU.com

1Speak with a licensed tax accounting regarding possible tax-deductions resulting from paid loan interests.