Should I Get A Home Equity Loan Or Line Of Credit?

The facts behind a Home Equity Loan and a Line Of Credit.

When borrowing against the equity of your home, here’s a secret that even your banker doesn’t want you to know. If you take out a home equity loan, chances are that you will be able to pay down the loan whenever you make a monthly payment.

But a line of credit is a hidden trap.

You may be told that you can contribute to and draw out of a line of credit as if it was a bank account. In theory, this is true, but in practice you will probably make withdrawals until it is maxed out. You would not be inclined to pay back money into an account that charges rather than pays interest. And then, no matter how many payments you make each month, the principal will never go down.

A home equity loan is preferable.

If your home equity loan has monthly payments from which a part is applied to principal, it is much better to take this route. Be sure this is the case before accepting the loan. Even if you never sell your house and receive the equity needed to pay off this loan, at least you know that someday the loan will be paid off.

Don’t leave a legacy of an unpayable loan.

My husband died with a conventional mortgage plus a home equity line of credit still outstanding. I have been unable to sell the house because the housing market has gone down drastically in the intervening years since my husband’s passing. Because the home equity line of credit charges interest-only payments and is maxed out, I will be pouring money down a $24,000 hole every month for the rest of my life. I cannot afford to make any improvements on the house because there is no more equity to borrow against. Even when I am gone, when will this money-eating monster ever meet its match?

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