A Better Way to Manage Your Everyday Money - Book - Page 40
Home equity
Home equity is the difference between what you owe (your mortgage) and the market value of
your home (how much you could sell it for). When you buy a house, your down payment creates
equity. Your home equity can be increased:
● by making mortgage payments which reduces the amount you owe on your mortgage;
● as the market value of your house increases;
● by making home improvements.
Loan vs. line of credit
A loan and a line of credit are both ways to borrow money. They differ in how you receive and
repay the funds.
● Loan - You receive a lump sum of money that is paid back with fixed monthly payments
over a set period of time. Interest is typically at a fixed rate, but can be variable. Loans
are best for one-time expenses, like buying a car or house.
● Line of credit - A loan that has a credit limit. You can borrow money from a line of credit
as needed up to the loan limit. Payments are made only for the money that you have
withdrawn. A variable rate interest is charged on the amount of money that is used. Lines
of credit are best for when cash needs may increase suddenly, like for home renovations
or education.
The most common types of lines of credit are personal, business and home equity
(HELOC). Typically, personal lines of credit are unsecured while business lines of credit
can be secured or unsecured. Home equity lines of credit are secured and backed by your
home. The available amount for a HELOC is based on the equity you have in your home.
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