Assuming the same interest rate, which is better: a home equity loan
or a mortgage? The property in question is in Michigan, USA.

Thank you,

J Wolfgang Goerlich

I assume that what you are proposing to do is to either take out a
home-equity loan against an existing property you own to purchase an
additional property or take out a mortgage on the additional property
to purchase it.

Assuming the same interest rates are involved (and you do not want to
assume this because mortgage loans include the interest-rate, points,
and other closing costs in the APR calculation, whereas home equity
lines of credit do not), one obvious difference is that you are
risking the loss of your existing property if you run into financial
trouble and have a home-equity loan against the existing property
instead of a mortgage on the new one.  If you take out a mortgage on
the additional property, then that property is the one that is
foreclosed upon if you are unable to make the payments.  In the case
of a home-equity line of credit, your existing property is the one at
risk.

Other differences exist.  The amount you can get from a home-equity
loan is based almost entirely on the equity in your home.  If you take
it a loan greater than the amount of the value of your home, the
interest is no longer tax-deductible, whereas mortgage interest is.  A
mortgage will be based on your credit history and the value of the
property being acquired, so having more equity in your home will also
increase the amount you can borrow, but it is not the only factor.

A mortgage provides a structured repayment schedule, whereas a
home-equity line of credit may not and may require a substantial
balloon payment at its end.  Furthermore, if you decided you wanted to
sell your existing property, you would have to pay off the home-equity
line of credit immediately, whereas you would not have to do anything
different with if you had a mortgage on the new property.

Based on these differences, a mortgage strikes me as a less risky and
more flexible approach to financing the purchase of the additional
property.

Sincerely,

Wonko

Sources:

"When Your Home Is On the Line: What You Should Know about Home-Equity
Lines of Credit" The Federal Reserve Board (July 25, 2001)
http://www.federalreserve.gov/pubs/HomeLine/

"The Hazards of Some Home-Equity Loans" by Terry Savage, MSN Money
http://moneycentral.msn.com/content/Banking/Homefinancing/P37886.asp

Search Terms: home equity loan mortgage risk

Great information, thank you very much.