The decision to go with a line of credit or home loan is something that should be given careful consideration. Both options offer a viable means of obtaining cash that is needed immediately. There are also some potential drawbacks associated with a line of credit or home loan that are worth investigating before making a decision.
When attempting to determine whether a line of credit or home loan would be the most beneficial financing strategy, it is important to assess the reasons why you need the financing. Understanding exactly which plans you have for the money includes determining if you actually need a lump sum now or would be better off having access to funds over a period of time. For lump sum situations, the home loan may be the best approach. If you have a project in mind where expenses would be incurred incrementally, the line of credit may be a better fit.
For example, if the plan is to take on a weekend project building a storehouse or other structure on your property, a credit line may be desirable. Since you only pay interest on the amount of the line you’ve actually used, it is possible to purchase supplies as you need them. This keeps the rest of the credit line open, allows you the chance to retire the borrowed amount quickly, and avoid at least some of the interest that would have been paid on a home loan for the same time frame. Here, the choice between a line of credit or home loan is fairly easy to make.
Another major consideration with a line of credit or home loan is the rate of interest you can command. If the rate on the line of credit is significantly higher, there is a good chance you will still end up paying more in interest over time, even if you borrow on the credit line and pay it off in short time before borrowing more. To determine which approach would be best when the interest rates are significantly different, make use of a loan calculator to determine your approximate overall costs. Many lenders provide free calculators on their web sites, making the task relatively easy.
Keep in mind when deciding between a line of credit or home loan, that a loan is very much like taking on a second mortgage. There is a monthly payment to be made for a fixed duration, at either a fixed or variable rate of interest. This may be a good idea, based on the particulars of your financial situation. On the other hand, the line of credit allows more control, in that a little can be borrowed when needed, paid off, and left at a zero balance until it is needed again.
Your level of self-discipline is important when making a decision between a line of credit or home loan. For people who can manage a credit line effectively, this is the best approach. People who need something more structured in terms of the repayment process, may find that the home loan is more practical and ultimately less difficult to manage.
