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Home Equity Comparsion: Equity Line vs. Loan

Home Equity Line of Credit Home Equity Loan

Works like a credit line:

  • You will receive "equity line " checks that that can be used to advance yourself a loan up to your approved available balance.

    Simply write the loan amount you need and deposit it into your money account.

Some lenders will also provide credit card access to your equity line account:

  • You can use it like a credit card, where all transactions will be posted to your equity line account.

  • We note a word of caution:
    even though your account is protected against fraudulent use, the last thing you need is having your home exposed to potential fraud in the event you lose or someone obtains access to your equity credit card.

  • We recommend that you refuse the card that is tied to your home equity line account.

    Instead, use the standard credit card to pay for purchases — find a credit card that offers rebate programs at our card center

    links to our credit card center:

    The credit card belongs to the bank, so you won't expose your home equity line to potential fraud. You will pickup the 25-day grace period before the charged amount will be due. You can then use your equity line checks to pay off the credit card charge.

Don't write equity checks to a vendor. Always deposit line advances to your money account.

  • Don't issue an equity line check to a vendor or establishment. You don't want your equity line checks floating through the clearing system.

  • Simply advance yourself money from your equity line and deposit it into your regular money checking account. Then use your checking account to pay the vendor

  • Even though you are protected against potential fraud, you want to avoid the hassle of getting your accounts rectified in the event they are violated.

  • Note that these checks can be used by others, so keep them protected in your home. Never carry these checks with you.

  • You might also consider using pre-paid credit cards to manage your equity line spending. See illustration.

Equity line rates are variable and indexed to the PRIME RATE or other rate index:

  • This means that your rate can increase or decrease whenever the PRIME RATE changes. The rate (APR) is calculated by taking an margin (percentage) and adding it to the PRIME RATE.

  • The interest (APR) that will be charged to your account will be only on the amount you actually use, not on the total amount of your credit line.

  • If the lending institution uses an index other than the "PRIME RATE", request from your lender a review of historical changes for the index rate being used. Compare this trend against the historical trends for the "PRIME RATE" to note frequency changes in APR and how high the rate has climbed.

  • All home equity line accounts must list the rate cap. This cap may vary by state.

Repayment terms for home equity lines may include one of the following plans:

  1. interest only payments plus any penalty-related fees,

  2. repayment percentage of the principal plus interest and any penalty-related fees.

    Example: your minimum payment may be 0.5% of the principal balance divided by 12 plus interest and any penalty-related fees.

  3. Any minimum principal repayment made on a monthly basis will not reduce your balance to zero at the time your draw period ends.

    Minimum principal payments are not designed to payoff the credit line. You will be required to pay off the credit line when your draw periods ends.
  • During your draw period, you should be able to pay down your equity line account at any time without prepayment penalties. If no, find another lender.

With most credit line programs, you can advance yourself a loan as many times as your like, as long as the advance does not exceed your approved available balance:

  • The advance feature is usually available for 5-10 years at most lending institutions, at which time you may renew your equity line option, payoff the loan amount, or convert your equity line balance over to a fixed rate equity loan amortized at repayment terms set by the lender.

  • Again, these terms may differ by lender. Some lenders do not offer a renewable feature or allow conversion of the equity line balance over to fixed-rate amortized loan.

    Please review the terms before making your final decision.


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The home equity loan is a fixed rate loan:

  • The money is advanced to you when you close your equity loan

  • This advance is an one-time loan, with no further advances made on your account.

Equity loan rates are fixed and set by the bank:

  • The rate will not go up or down during the repayment period of the loan.

Your monthly payments are fixed:

  • The amount and number of payments depend on the repayment terms of your loan. Lenders offer a range of repayment terms, generally from 5-20 years.

    calculate your repayment amount

You may payoff your equity loan at any time:

  • You need to check the lender's prepayment terms. Some lenders will charge a prepayment penalty under certain circumstances.

How Much Can You Borrow

The approved available equity line or loan balance is secured by the equity value in your home:

  • The total amount approved depends on your LTV position.

  • These amounts are determined by taking a percentage of the appraised value of your home and subtracting the balance owed on the existing mortgage.

    For example:

    Let's say that your home has an estimated market value of $250,000. The amount that you still owe on your first mortgage and any other liens is $100,000. The maximum amount you can borrow is calculated as follows:

    calculate your own LTV borrowing amount


Market Value:  $250,000  $250,000
Percentage LTV:  70%  80%
Percentage of Value:  $175,000  $200,000
 Less Mortgage Debt:  $100,000  $100,000
 Equals Total Equity:  $75,000  $100,000

Market Value:  $250,000  $250,000
Percentage LTV:  90%  100%
Percentage of Value:  $225,000  $250,000
 Less Mortgage Debt:  $100,000  $100,000
 Equals Total Equity:  $125,000  $150,000