Mortgage / Equity

Home Equity
Line of Credit vs. Mortgage

A home equity line of credit or real estate line of credit gives a property owner some advantages that a mortgage doesn’t. Generally, an equity line of credit is usually a better deal for a property owner than a second mortgage.

In a mortgage a specific amount of money is borrowed against a piece of property. A mortgage is a onetime arrangement in which the money is loaned once and has to be paid off. A mortgage can only be used once but can take years or decades to pay off.

A line of credit is an agreement that lets a property owner borrow money against the equity in a piece of real estate. One advantage to a line of credit is that it is an agreement that can be used any time so it is always available. Another advantage is that the borrower can decide how much credit they can use.

Advantages to a Line of Credit

The biggest advantage a line of credit provides over a mortgage is that it is a more flexible arrangement. Using a line of credit the owner can only borrow what they need and limit credit costs.

For example a homeowner can take out a line of credit for repairs and borrow only what they need to cover the repair costs. This can help a homeowner limit credit costs and interest charges.

Another advantage is that an owner might be able to decide how much of a line of credit they pay off. A mortgage usually comes with set payments that have to be paid. With a line of credit the owner can determine the amount of the payments.

Finally a line of credit can be available on a long term basis. This means that a homeowner can have a line of credit available to pay for future expenses such as repairs and other emergencies. A homeowner can cope with emergencies without tapping into savings or investments.

Advantages to a Mortgage

Mortgages do provide homeowners some advantages in the line of credit vs. mortgage battle. Mortgage interest is usually lower than line of credit interest so mortgage costs can be lower.

A mortgage will usually enable a homeowner to use more of their property’s equity. The credit in a line of equity credit is usually a percentage of the equity, say 80%. A mortgage can contain the full amount of equity so it can help a homeowner recover all the equity. For example on a home with $70,000 in equity, a second mortgage would provide $70,000 while a line of credit would provide $56,000 worth of credit.

Mortgage payments are usually a set amount that the borrower will have to pay each month. This is so because mortgage payments consist of a percentage of the principal plus the interest. Line of credit payments are often adjustable, mortgage payments are usually the same.

Mortgage interest is usually tax deductible in the United States while line of credit interest may or may not be tax deductible. This means that a homeowner is more likely to get a smaller tax bill with a mortgage.

Which to Choose: Mortgage or Line of Credit?

Generally, a homeowner should get a line of credit if they only need a small amount of money. Setting up a home equity line of credit enables a homeowner to keep expenses low and contain costs.

If a homeowner needs a lot of money then a second mortgage might be a better deal. More money will be available and interest rates will probably be lower with a mortgage.