when you own a home, you’re building equity. And a lot of people use that equity as collateral to borrow money, especially when they’re borrowing to make a big purchase like a car or a vacation. Home equity loans are for tax deductible interest, lower rates and longer pay back, so they can be a smart idea.

But the first thing you need to think about when you’re drawing up that borrowing plan is which type of equity loan you’re looking for - a regular loan or a line of credit. Whats the difference? Well a home equity loan is really just a second mortgage and it acts like a first mortgage. In other words, you lock in an interest rate, you’re payments are fixed, and so is the amount of time you have to pay the loan back.

A line of credit though is more like a credit card. The interest rate can fluctuate, you can draw on it or not at your whim, and the payments and rate of the loan will change accordingly.

So which should you use? Well now that you know the difference, make the loan fit the purpose. In other words, if you’re borrowing for a non-recurring expense like a home addition, use a fixed loan like a home equity loan. But if you’re going to be taking out a little here and paying it back and taking out a little there, like for school expenses, a line of credit may make more sense.

But here’s a warning. In some parts of the country where prices are falling, lenders have already canceled already approved lines of credit. So if the bubble has burst in your neighborhood, keep that in mind.

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This entry was posted on Monday, May 26th, 2008 at 3:20 am and is filed under Home Equity. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.