Compare a Conventional Mortgage to a HELOC
- 1). Contrast the purpose of the two loans. Borrowers take out a conventional mortgage to purchase a home in the first place. Borrowers take out an HELOC after having paid down their mortgage enough that they have additional home equity to borrow against. An HELOC can be taken out for any purpose.
- 2). Contrast the distribution in funds. When you take out a mortgage, you receive the entire amount immediately to purchase the home. With an HELOC, you can tap the credit line as needed during your withdrawal phase. This means that you only pay interest on the amount of the HELOC being used at the time. For example, if you have a credit limit of $30,000 but are using only $10,000, interest would only accrue on the $10,000 in use.
- 3). Compare the interest rate options between the two loans. A mortgage can have either a fixed interest rate or an adjustable rate. According to Lending Tree, HELOCs almost exclusively use an adjustable interest rate.
- 4). Contrast the methods of repayment. With a conventional mortgage, payments consist of both interest and principal and the entire loan is paid off at the end of the mortgage term. With an HELOC, most lenders allow borrowers to make interest-only payments on the loan, with the entire balance being due at the end of the loan. Some HELOCs have a repayment period after the borrowing period, while others allow the borrower to refinance the HELOC into a home equity loan.
- 5). Contrast the tax benefits. A mortgage permits the borrower to deduct the interest on the first $1 million ($500,000 if married filing separately) while an HELOC only permits the interest on the first $100,000 ($50,00 if married filing separately).
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