Line or Loan? Determining the Home Equity Solution That's Right for You
Posted
on Monday, March 8, 2021
in
Financial Education
It's become a popular way for homeowners to borrow, offering attractive rates, convenience, and flexibility. It's home equity credit – a borrowing solution that lets you borrow using the equity in your home, which is the market value of your home minus the amount you owe on it.
There are two types of home equity credit: a home equity loan and a line of credit (HELOC). A home equity loan is a fixed-rate loan that gives you access to funds in one lump sum. In contrast, a home equity line of credit is a revolving line of credit, similar to a credit card, which lets you borrow and repay funds over and again.
Finding your home equity solution
So how do you know which option is right for you? In general, if you want to make a one-time purchase, which requires you to receive funds all at once, a home equity loan might be the best choice. In contrast, if you need to borrow money over time to fund ongoing expenses, a home equity line might make more sense.
Another main difference is that home equity loans offer fixed rates. That means, you will have fixed monthly payments of principal and interest, which can make budgeting easier. With a HELOC, in contrast, you will have a variable rate that's tied to an index, such as The Wall Street Journal Prime Rate. So if interest rates rise or fall, your payments will adjust accordingly. With a HELOC, you will also have the option to pay interest only during the draw period, which allows you to keep your payments lower. However, if you still have an outstanding balance after the draw period is over, you will have to pay principal and interest.
Keep in mind that because you will only pay interest on the money you borrow, a HELOC can be a great safety net to help you prepare for unexpected expenses.
Think before you borrow
In short, before deciding on a home equity line or loan, consider these questions:
Why do I need to borrow?
Do I need the money all at once or will I borrow over time?
How long will it take me to pay the money back?
What are the interest rates?
And of course, remember that with any type of home equity credit, you are using your home as collateral, so it's important to borrow wisely and make your payments on time.