Home Equity Line of Credit Vs Home Equity Loan – The Mystery Revealed

Home Equity Line of Credit Vs Home Equity Loan

Home Equity Line of Credit Vs Home Equity Loan

If you’re in the market for a loan, you need to make sure you find the best option for you. With homeowners wanting to get cash out of their homes, the home equity loan market is on the rise, as are home equity lines of credit. But what’s the difference between these two? In this article, we’re clearing up the confusion between a home equity line of credit vs home equity loan once and for all!

Home Equity Line of Credit Vs Home Equity Loan

What Is A Home Equity Loan?

In a nutshell, home equity loans are pretty much second mortgages. In addition, you’re more than likely to get a fixed rate. And you’ll make a payment that covers both your principal and your interest on a monthly basis.

 
Your money advanced to you in a lump sum, so these are ideal for larger, one-time purchases.
 
Remember though, that your home is the security for your loan. This means that if you don’t make your payments, you’re putting your home at risk.
 
You’ll also have to pay for your closing costs when you first take out your loan.
 
The good news?
 
Your interest could even be tax deductible if you’ve borrowed $100,000 and under.  Also, it’s likely that your interest rate will remain low.
Scrabble letters spelling out equity

 What Is A Home Equity Line Of Credit?

Home equity lines of credit are more difficult to understand than home equity loans. But they’re both as valuable depending on your needs.

 
Please note that you’re likely to see this abbreviated as HELOC in lots of places.
 
This will give you a line of credit that you can pull funds from whenever you need. You can’t request an additional advance, once you reach the most amount of funds you can borrow.
 
Like with home equity loans, you’ll also have to make a payment every month on a home equity line of credit.
 
The benefit is that you are often allowed to make payments that are interest-only for a period of time. Once your general repayment period has come to a close, it will be time to pay down whatever is on your balance.
 
You’ll notice that the structure here is like what you do when you pay your monthly credit card bill.
 
As with the equity loans, your home will still serve as collateral in this line of credit. So, as with any financial decision, you’ll need to think hard before you jump to sign up.
 
A line of credit option is a wonderful choice if you have an ongoing project, like a home remodel. That way, you know you’ll always be able to get the cash you need to pay for the project from somewhere.

 Where Can I Learn More?

Now that you’re clear on the difference between a home equity line of credit vs home equity loan, maybe you have a few other credit, loan, and more general financial questions you’d like to have answered.

We’re here to help!

Check out our website and blog to learn more about credit cards, other ways of financing your home, and credit protection.

Your financial life shouldn’t be a mystery! Start solving your problems and getting informed today.

Leave a comment below. Got questions? Check out the About Us page or shoot me an email.

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8 Comments

  1. Patrick,
    I would guess that either one of these options would require an assessment of the property and home. Would I be correct? Do market downturns then naturally impact your available loan/line of credit? Some are predicting another market correction by 2019. So would it be wise or unwise to secure a loan/HELOC before something like this happening?

    • Neil – It would definitely be wise to secure a HEL or HELOC now, as real estate values may be impacted soon. And yes your lender will require a recent appraisal of your property value before they would approve your loan.

      As you may already know, we are in the ninth year of an expanding stock market cycle.  As you mentioned, many economists are predicting a possible recession by 2019.

      If you get approved for a home equity line of credit now at least it will establish the highest possible line amount available.

      Something to also keep in mind is that lenders suspended advances on lines of credit back during the crash in 2008.  Hopefully it won’t happen again.  However, check your loan doc’s to see if this limitation can be imposed by your lender.

      A word of caution, rates are on the rise and HELOC’s are adjustable rate, so expect to pay more on your loan in the future as your index gets adjusted.  Again, check your loan documents before you sign on the bottom line.

      Patrick

      Credit Squared

        

  2. Well where was all of this info when I needed it 🙂

    Happy to say my refi went well, but this is definitely one of those matters where you want to know what stuff means.

    My husband gets so nervous signing big stacks of papers that he doesn’t understand a lick of. I’ll have to send him here…

    • Hi Heather – Awesome that your refi went well.  You must be doing something right.

      It does pay to know the details, particularly when it has to do with large lifetime financial commitments like a home equity line of credit or a home equity  loan.

      I don’t blame your husband for getting nervous about signing all those papers.  Most people really don’t understand them.

      The one that is most important is your mortgage note and verifying the terms that you agreed to with your lender.

      There other important items in that stack, but many of them are disclosures that protect the lender or are required by law.

      It would be great if you send your husband here. Also, please send your friends and family here as well, as there is a lot of great content and more to come.

      Patrick

  3. Hi, Patrick. What a good explanation about the difference between these two mortgage products.

    I’m glad you warned people to think long and hard about going one of these routes. As you said, the house is the security.

    That said, if you want to, or need to make improvements to your house these are certainly options to look at.

    I personally lean toward the HELOC as you only use what you need.

    Good info here.

    • Warren,

      Thanks for commenting about the post.  Many times people do not understand the difference between the two. So, I thought it would be helpful to create a post about the differences.

      Although there are both pros and cons to a home equity line of credit and a home equity loan, I tend to agree with you that a HELOC is a better option.

      They act like a revolving line of credit and the rates are much lower than a credit card.  In addition, the payments are interest only.

      That being said, a HELOC has some risk in a rising rate environment, as they are usually tied to an index such as LIBOR or PRIME.

      With an adjustable rate your payments could go up. In addition, if home values decline your lender could limit the amount you could draw against your line of credit.

      On the flip side, home equity loans are usually fixed, so they don’t have the risk of the interest rate changing. So you will know your payment for as long as you have the loan.

      Thanks

      Patrick

      Credit Squared

  4. Your article on both home equity loan and home equity line of credit is very informative.

    If you default on a equity loan, your home can be taken away from you. If you default on the line of credit, can your creditor also take away your home from you even though there is no collateral?

    In addition, which one has a higher interest rate?

    • Hi – Glad that you found the article informative.

      When you take out a home equity line of credit or a home equity loan the lender secures the loan using your home as collateral.  So if you default on either type of loan the lender can foreclose.

      Rates are typically higher on a home equity loan, but the nice thing about that is the rate is usually fixed, so you know what your payment will be for the life of the loan.

      With a home equity line of credit the rate tends to be lower as it is tied to an index like LIBOR or PRIME. Rates have stayed low for several years now, but beware rates are trending upwards.

      Credit Squared

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