Home Equity Loans: Just the Facts

If Dragnet's Sergeant Joe Friday were to shop for a home equity loan, you could bet that he'd look past the fluff and go straight for the facts. Incorporating the legendary police officer's "just the facts" mentality is your best approach to solving the mystery of home equity borrowing. So put on your detective hat, and flip open that notepad.

HELOC vs. home equity loan

Home equity loans falls into two categories: home equity lines of credit (HELOCs) and home equity loans. Both are secured by a second lien on your property. A HELOC is a revolving credit line, while a home equity loan is a form of closed-end borrowing.

A HELOC allows you to advance cash or make principal payments at your discretion. The interest rate is variable, and minimum payments generally won't reduce the principal balance significantly.

A home equity loan provides a one-time sum of cash. It carries a fixed interest rate and monthly payment. Home equity loans are sometimes called home improvement loans, because they're well suited for fixed budget projects, like remodeling your living space.

Ups and downs of home equity borrowing

The number one advantage of a HELOC is its flexibility. You can access more cash or make principal payments without penalty. The low minimum payments are budget-friendly, as well.

A HELOC's variable interest rate structure exposes you to the risk of rising rates and increasing minimum payments. Also, since the HELOC offers you the option to pay only interest, you could be left with a lump sum due at maturity.

Alternatively, home equity loans amortize with a fixed rate of interest. As a result, you know exactly how much you need to pay monthly until the loan is paid off.

Evaluating the Trade-Off

If you want to tap into your home's equity, research prevailing HELOC rates and compare them to home equity loan rates. Consider how your situation may be affected if rates rise. Then, decide how important the flexibility is to you, and whether the trade-off makes dollars and sense.

The equity borrowing mystery is a tough case to crack, but the investigative style of Sergeant Friday should enable you to find the killer loan.