Choosing Between a Florida Home Equity Loan and a Home Equity Line of Credit

Are you trying to decide between a Florida home equity loan or a line of credit? Consider your goals, your payment schedule, your spending habits and your risk tolerance.

Remember that a home equity loan is best used for a one-time goal for which payment will be due in full and which has long-lasting benefits. For instance, a Florida home loan of this nature makes sense if you want to fund a specific home improvement project that boosts the equity in your house or if you want to pay off high interest credit card debt in one fell swoop.

What’s more, a these Florida home loans make sense if you like the security of a locked-in rate, knowing exactly how much you’ll owe every month.

A HELOC, by contrast, gives you more repayment flexibility and lets you borrow only the amount you need when you need it. Through it, you’re only paying interest on the amount you’ve taken, whereas with a loan, you pay interest on the money whether you’re using it or not.

Comparing the options

Therefore, if you’re embarking on a multiyear home improvement project for which you’ll have to write checks at varying times during that period, a HELOC might be best. (But carefully read the terms of your agreement. Some lenders may require you use a certain amount of credit by a given time, or that you withdraw a minimum every time you make a withdrawal.)

Also, because variable-rate HELOCs are tied to the prime rate, they can be more risky when rates are rising.

HELOCs are also good for short-term financing needs that arise unexpectedly, especially if you know you’ll have the money in hand to cover an expense a few months after incurring it, perhaps through the sale of property or stocks.

A line of credit can be a smart choice for people who have already paid off their first Florida home mortgage and want ready access to cash if the need arises.

So, should you tap your home equity?

As attractive as a HEL or HELOC may be, ask yourself if you should be tapping into your home equity at all - keep in mind you put your home at risk of foreclosure if you can’t make required payments. And consider whether there are less expensive ways to borrow money.

For instance, it may make more sense to do a cash-out refinancing, which increases your mortgage, potentially lowers your rate and pays you the difference between your old and new mortgage in a lump sum.

Second, if your reason for taking out a Florida mortgage loan or line of credit is to help pay for years of living above your means and you haven’t taken steps to rein in your spending, you shouldn’t put your home at risk.

Lastly, if you’re considering a HEL or HELOC for the tax break, think carefully. The interest deduction is not a dollar-for-dollar reduction of your taxes, just a percentage. Plus, if your adjusted gross income is high, the phase-out for itemized deductions may kick in, preventing you from taking a full deduction, if any at all.