Home equity loan vs second mortgage

Often there is confusion about the (differences between a home-equity loan and line of credit. Payment on both instruments qualify for the housing allowance exclusion only if the proceeds are used for housing expenses, e.g., room addition, new roof, etc.

A home-equity loan is actually a second mortgage. Like a first mortgage, it is for a fixed sum, loaned for a fixed period of time. It has a higher rate of interest than a line of credit, but because rates are usually fixed, you know exactly what your monthly payments will be for the life of your loan. This is to your advantage, especially if you lock in a low rate.

A home-equity line of credit is like a credit card. You get preapproval for a certain dollar limit for a certain number of years. You can then tap into your line of credit when you need cash. Most lines of credit have variable interest rates, so your monthly payments will vary.

Banks limit how much they will lend you, often 75% of the value of the house minus the balance due on the existing mortgage. Your other debts, income, and credit history also play a role.

For calculators to help you determine which type of loan is better - as well as how much interest you'll pay - visit www.interest.com. FF

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