<p>Embarrassed though I am at outing myself as someone who doesn’t know much about money, I could really use some advice. My dh (just as ignorant about financial matters as I am, but won’t admit it) and I are thinking about taking out either a home equity loan or a home equity line of credit to finance some improvements to our home and make a down payment on a car for one of our kids. But the more I read about these two kinds of loans, the less I understand the difference between them. I know one’s variable and one’s fixed. I know you only have to make payments on the amount you actually use if you take out a line of credit. But I don’t know which is better for our situation. </p>
<p>We’re talking about a small amount ($15K or so), have plenty of home equity with only 2 years left on our mortgage, and an excellent credit rating. Except for the mortgage and car loans, we’ve never borrowed anything (and dh is losing sleep at the prospect). Any advice? Is it smarter to take out either of these loans rather than cash in some kind of asset (such as savings bonds or a CD)? I’m grateful for your input - thank you!</p>
<p>Look at bank’s websites and you’ll see how they differ at the banks you deal with. At our credit union, a HELOC is variable and HE is a fixed rate. Both, I think, are tax deductible, but the amount you’re talking about is pretty small. </p>
<p>Why would you borrow against your house to buy a car (and presumably spread the payments over 15 years or so) when you can get excellent car loans (GM or somesuch is offering 0% loans, I think) with rates that are competitive with HE rates? I think most people would say that’s unwise. Improvements to your home are a different story.</p>
<p>I’m no financial wizard, just try to tackle these problems on my own behalf and that’s what I’d question first. </p>
<p>Also, bank websites have loan calculators. Plug in the cost of a $15,000 car at 6.5% paid over 15 years, vs. the same car bought with a regular car loan and paid over 5 years at 8% or whatever the rate is. You’ll see how much more you spend in interest on the same car.</p>
<p>Excellent info - obviously what I needed! I just came up with the idea of adding the down payment on a car to the amount we’d want for home improvements because my husband is allergic to spending money and can’t bear to see our bank balance go down. But he did offer to make a down payment on a car for one of our girls, and now’s when she needs it. (She’ll be making the monthly payments herself.) The home improvements can’t really be put off much longer, either.</p>
<p>I have tried a few websites and the monthly payments for either type of loan are quite manageable. But I still can’t tell which would be better for us - and the loan officers are unanimous about recommending the loan, not the line of credit. They seem a little annoyed that I can’t quite grasp the difference!</p>
<p>The home equity borrowings are deductible on your taxes, which lowers the “after tax” interest rate a little bit. That is part of the reason people use that particular type of borrowing.</p>
<p>Generally though, if you are a conservative investor, you’ll find that the rates you pay on borrowings exceed what the banks and other institutions pay you on your savings. Therefore, unless your investments are returning far more than the rate on the home equity loan, you would be better off to just sell some investments or cash some cd’s and pay cash. This assumes that you will still have enough cash and near cash reserves on hand afterwards. </p>
<p>Haven’t studied the differences between the line of credit and the straight loan, so can’t help there.</p>