If your home needs repairs, you can tap the equity in your home to pay for the needed work. You have two options available to you: a home equity line of credit (HELOC) or a home equity loan (HEL). Both offer distinct advantages for the homeowner who has built up equity in his home.
Equity
Simply defined, equity is the current value of your home minus the amount you owe on your mortgage. For example, if you have your home appraised and the appraiser determines that it is worth $240,000 and the outstanding balance on your home loan is $140,000, then you have $100,000 in equity. According to Smart Money, lenders allow homeowners to tap between 75 and 90 percent of that equity amount. The collateral for both a HELOC and HEL is your home; compare both options to find a plan that is right for you.
HELOC
A home equity line of credit or HELOC is a type of revolving credit that can be tapped by the homeowner as needed. According to the Federal Reserve Board, you can borrow from your credit line whenever you need the funds during a fixed period of time, such as 10 years. During that "draw period" you may be able to renew your HELOC or take out another loan. You'll be making payments to your lender once you draw on those funds, with a payback schedule outlined. Most lines of credit are variable (adjustable) interest and payments amounts can vary. Talk to a lender about your HELOC options.
HEL
A home equity loan allows you to take out equity in your home in one lump sum. According to MSN Money, interest accrues immediately and you'll have a set schedule to pay back that loan. Most home equity loans offer fixed interest rates and fixed payment amounts. Compare HEL offers with your lender.
Tips and Warnings
Your HEL or HELOC is treated as a second mortgage on your home. If you default, the holder of your first mortgage gets paid first in foreclosure, with your equity lender paid second. For this reason, your HEL or HELOC will likely carry a higher interest rate than your primary mortgage. Only borrow as much money as you need to pay for home repairs.
To boost your credit score, clean up your credit reports before applying for your loan or line of credit. The higher your credit score, the more favorable your HEL or HELOC terms. Visit AnnualCreditReport.com to obtain your free copies.
Tags: your home, home equity, your credit, line credit, your HELOC, credit HELOC, credit score
