Home Equity Loan – A fixed amount loan paid in one lump sum where the amount loaned is based upon a percentage of the equity owned in a home. This type of loan is a Second Mortgage of one of the two following flavors: Fixed Rate Mortgage or Adjustable Rate Mortgage, and eligible for all the bells and whistles available to those types of mortgages.

Home Equity Line of Credit (HELOC) – A line of credit extended to the homeowner, again based upon the equity owned in the home, which can be borrowed as necessary up to a fixed amount.

The amount of home equity allowed to borrow against will typically be determined by subtracting the current amount due on the primary mortgage from the product of 80% (80% is the maximum percentage of the total equity owned in a home that many lenders allow to be borrowed, however, there are some Home Equity Loan and Home Equity Line of Credit providers that offer percentages both above and below this figure) of the current appraised value of the home. For example, a home valued at $100,000 with a $50,000 mortgage will be eligible for a $30,000 Home Equity Loan or Home Equity Line of Credit.

Advantages:

• Home Equity Line of Credit – Lending institution fees are typically low when compared to a Fixed Rate Mortgage or Adjustable Rate Mortgage fees.
• Home Equity Loan & Home Equity Line of Credit - Interest may be tax deductible. Discuss this with an accountant as the deduction allowed is not unlimited and is particular to your individual circumstance.
• Home Equity Line of Credit – The period of time allowed for withdrawal from the credit line varies between loan institutions. This is also true for the credit line balance repayment period.

Disadvantages:

• Home Equity Line of Credit – Most Home Equity Lines of Credit have high interest rate caps.
• Home Equity Line of Credit – High exposure to interest rate fluctuations because HELOC interest rates are tied directly to the Federal Funds Rate which, at times, can by much more volatile than the majority of index’s an Adjustable Rate Mortgage can be pegged to.
• Home Equity Line of Credit – Some HELOC’s require complete repayment at the end of the withdrawal period.
• Home Equity Line of Credit – Beware of low introductory interest rates with large post intro interest rate adjustments.

Before You Sign – What to watch out for:

• Ask your lender, Mortgage broker, or Title officer for a copy of your Balance Sheet, Closing Statement, or Settlement Cost Sheet. (This document is called many different things by different institutions; use any of these terms and your lender, broker, or title officer should understand what you’re looking for.) By law, a borrower is entitled to review the settlement cost sheet one business day before closing on the loan – You absolutely must exercise this right and ask questions if you find something you don’t understand! Please follow the link above to find out what should be included in this document and why it matters to you.
• Home Equity Line of Credit - Ask your lender for your loan margin. The margin is the interest rate percentage added to the Prime Interest Rate by your lender and is not required to be disclosed up-front in a Home Equity Line of Credit. This is a shady gray area where, if you’re not careful, you can unexpectedly find yourself paying a prohibitive interest rate after you’ve borrowed money from your line of credit.
• Check the fine print for prepayment penalties if you close your Home Equity Line of Credit prior to expiration.
• Watch for "account maintenance fees", "servicing fees", or whatever else they may call jamming you up for a few extra hundred dollars a year.
• Check introductory rates and periods; these can get quite complicated just like an Adjustable Rate Mortgage. Ask your lender to map it out precisely in a fashion you understand including when the margin added by the lender is included and how that inclusion will effect your monthly payments.
• Some HELOC lenders require that you make minimum withdrawals – you may have to borrow $1000 to use $139.27.
• Ask your lender, broker, or Title officer for an accounting estimate of all up-front fees you will be charged. These charges may come from the lender, title company, other third party, etc.

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