Home Equity Loans and
Lines of Credit

Ah the cycle of (debt) life ... Once you've racked up a bunch of credit card bills (after buying all that cool geek stuff), it's inevitable that you'll look for a better deal on that debt. For some folks, it's an endless cycle. Rack 'em and pay 'em down. Homeowners with a considerable amount of debt often tap the equity in their homes to help ease those cash flow problems while freeing up enough cash to buy more gotta have stuff--whether it's this year's killer PC, monster flat screen TV, or a snazzy new ride.

To tell the truth, home equity is a great thing when used properly. As housing prices rise, so does the equity (value) you have built up in your home. If your credit rating is good and the value in your home has risen, the banks will compete with each other to put that cash in your hands.

But while that burst of cash can seem like a gift, it's always best to enter into any transaction as a knowledgeable borrower. After all, you're not getting a present ... you're merely borrowing your own money.

So lets start with the basic question ...

What's the difference between a home equity loan and a home equity line of credit?

The Wisconsin Department of Financial Institutions (WDFI) defines a Home Equity Loan as "a fixed or adjustable rate loan obtained for a variety of purposes, secured by the equity in your home. Interest paid is usually tax-deductible. Often used for home improvement or freeing of equity investment in other real estate or investment." A home equity loan is one big check. You ask for 50K. They approve the loan and cut you a check for that amount.

A line of credit is a bit different. The WDFI defines Home Equity Line of Credit as "a loan providing you with the ability to borrow funds at the time and in the amount you choose, up to a maximum credit limit for which you have qualified. Repayment is secured by the equity in your home. Often used for home improvements, major purchases or expenses, and debt consolidation."

Once your home equity line of credit is approved, you draw the money as you need it.

Like a standard home equity loan, a home equity line of credit can be based on either a fixed or adjustable rate, depending upon the options offered by the lender. But take note: adjustable rate loans or lines of credit can be scary things. The more rates rise, the more you owe. Fixed rate agreements, on the other hand, are just that -- fixed for the term. You know what you're going to pay.

As part of the approval process, your home will likely need to be appraised. The costs of appraisal and other associated costs might need to be paid up front, although quite often they'll be rolled into the home equity loan or line of credit.

It's a wonderful world (wide web) these days ... you can do all of the "what if" home equity scenarios you want ... without ever having to talk to a lender. Any financial website worth its salt will have a bevy of calculators to help you figure out how much you can save each month.Once you've done all of your homework, you can walk through the door of your lender (be it virtual or not), as an informed borrower.