Home Equity Loan or Line of Credit

Consider the amount you need to borrow and what you need it for to determine which is right for you.

If you’re a homeowner, you can borrow against the value of your house through either a home equity line of credit (often called a HELOC or a line) or a home equity loan (often called a HEL or loan). Both are essentially a second mortgage.

What’s the difference?
A HELOC allows you to draw funds, up to a predetermined limit, whenever you need money. There is an interest payment due each month, with the option to pay off as much of the line as you want. The way that you draw and repay funds for a HELOC is similar to the way you draw and repay funds for other revolving lines of credit, such as a credit card.

With a HEL, you receive a lump sum of money and have a fixed monthly payment that you pay off over a predetermined time period. In each case, the amount you can borrow is based on factors such as your income, debts, the value of your home, how much you still owe on your mortgage and your credit history.

Benefits
The appeal of both of these types of loans is their interest rates, which are almost always lower than those of credit cards or conventional bank loans because they are secured against your home. In addition, the interest you pay on a home equity line or loan is often tax deductible (consult a tax advisor about your particular situation).

Which is best for you?
Generally, a HELOC is a good choice to meet ongoing cash needs, such as college tuition payments or medical bills. A HEL is more suitable when you need money for a specific, one-time purpose, such as buying a car or a major home renovation.

Comparing the costs
Both HELOCs and HELs usually carry a higher interest rate than that of a first mortgage. With a HEL, your fixed rate enables you to budget a set payment monthly without worrying about increasing costs should interest rates rise. With a HEL, there are also closing costs that you should consider.

A HELOC usually carries a lower initial interest rate than a HEL, but its rate fluctuates according to the prime rate, so there is more interest rate risk. In addition, there are generally no closing costs when you open a HELOC.

Naugatuck Valley Savings and Loan offers financing on properties located within its lending area.