If you are thinking about a home equity line of credit you also might want to consider a
more traditional second mortgage loan, also referred to as a home equity loan. This type of
loan provides you with a fixed amount of money repayable over a fixed period. Usually the
payment schedule calls for equal payments that will pay off the entire loan within that
time. You might consider a traditional second mortgage loan instead of a home equity line
if, for example, you need a set amount for a specific purpose, such as an addition to your
home.
In deciding which type of loan best suits your needs, consider the costs under the two
alternatives. Look at the APR and other charges. You cannot, however, simply compare the APR
for a home equity loan with the APR for a home equity line because the APRs are figured
differently.
- The APR for a traditional mortgage takes into account the interest rate charged plus
points and other finance charges.
- The APR for a home equity line is based on the periodic interest rate alone. It does not
include points or other charges.
This information is adapted from "What You Should Know About Home Equity Lines of Credit
When Your Home Is on the Line" published by the Federal Reserve Board and the Office of
Thrift Supervision and from "FTC Fast Facts - Home Equity Credit Lines" published by the
Federal Trade Commission.