Home Benefits/Eligibility Credit Line/Equity Loan Common Problems HUD Loans
				Line of Credit vs. Equity Loan As we noted earlier, there are two major home improvement financing methods: a line of credit based on equity or a HELOC, or a standard Equity Loan (otherwise known as a 2nd mortgage if a 1st mortgage already exists). The Equity Loan is for all intents a purposes a mortgage (a loan that uses a property as collateral). Many times these loans are on homes that already have a 1st mortgage which was used to finance the purchase of the house, but sometimes it can be against a home that is fully owned. Again, the Equity Loan is drawing financing against the value of the home, and the house guarantees that the bank gets paid of the loan goes into default (the house is foreclosed or receives a lien to force sale and recovery of funds). Many people are protected under a Homestead Act protection with 1st mortgages, but they don’t understand that by voluntarily signing a 2nd mortgage Equity Loan they voluntarily give up this protection to the lender. So if they do default, a Homestead Act protection will not stop the lender from forcing a sale of their house. However, this is a rare occurrence. In practice, Equity Loan interest rates are very affordable and comparable with traditional home loans, thus making the borrowing very affordable. Additionally, with long payment terms, the loans become very feasible on a cash flow basis for consumers via low monthly payments. The Line of Credit loan is not really a loan per se. It is more similar to a credit card in that the home equity line of credit (or HELOC) is guaranteed by your house equity and allows you to borrow up to a certain amount as you need to. The flexibility avoids borrowing from day one if you don’t need it, and if your lender maintains the account you can borrow again and again after payment. However, the interest charged tends to be higher than an Equity Loan due to the repetitive loan risk and unpredictable use by the customer. Further, lenders can shut off a HELOC at any time if they feel their own risk or your borrowing is too much for them. Many HELOCs are cut off with very little notice and many times for reasons having nothing to specifically do with the borrower. Previous - Benefits & Eligibility Next - Common Problems / Situations