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Choosing a loan or line of credit

Posted September 10, 2014 in Advice Column, Clive, Des Moines West

A home equity loan might be best if you plan to use the money in a lump sum for a one-time occasion such as consolidating credit card debt, replacing the roof or paying for a wedding. The interest rate is fixed and so are the monthly payments, and you can budget accordingly.

A HELOC (home equity line of credit) might be better if you will need money periodically and not all at once. This is the case in home remodeling projects when you pay the contractor in two or more draws. Or perhaps you will need extra money at the beginning of each semester over the next four years for college expenses. A HELOC gives you the flexibility to borrow what you need, when you need it.

Q: Do I need the money in a lump sum, or in several installments?
A: If you need it in a lump sum, lean toward getting a home equity loan. If you need the money in installments, lean toward getting an equity line of credit.

Q: Is it for a long-term or a short-term purpose?  
A: If the money is to be spent on something that will last a long time, like a roof or a car, an equity loan might be better. If the money is to be spent on something that won’t last long — like a semester in college or a wedding reception — think about getting an equity line of credit.

Q: How big a monthly payment can I handle?  
A: A home equity loan requires you to pay principal and interest every month for the life of the loan. A home equity line of credit could allow you to pay just the interest for several years, if that’s how it’s structured.

Q: Would a line of credit tempt me to use the money carelessly?  
A: Naturally, if you answer this in the affirmative, you should consider a home equity loan, because it’s not a revolving credit account.

Q: Does a variable rate bother me?

A: A home equity line of credit has an adjustable rate that may change when the Federal Reserve raises or lowers the federal funds rate. If you don’t like the idea of a rate that could rise, consider getting a home equity loan, which has a fixed rate.

Information from realtor.com, data provided by Bankrate.com provided by Cari Wilson, Cornerstone Community Credit Union, 414 61st St., Des Moines, 274-1460.

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