The Difference Between Home Equity Loans And Lines Of Credit
If you own a home, it is likely one of your most valuable assets.
After you move in and begin to make payments towards your mortgage, you will start to gain what is known as home equity. Home equity is the difference between your remaining mortgage loan amount and the current market value of your home. In other words, if the value of your home has increased, and you have paid your mortgage down - you probably have a healthy amount of equity in your home.
In 2021, the average homeowner in Washington, D.C., Maryland, Virginia, and New Jersey gained over $30K of equity in their home. Homeowners can borrow against their home's equity for large purchases like home renovations or college tuition costs.
Home Equity Loans vs. Home Equity Lines of Credit
There are two ways to borrow against the equity in your home - home equity loans and home equity line of credit (HELOC). Home equity loans and lines of credit are both considered secure loans that use your home as collateral. Each of these loan types will provide you with immediate access to funds that could help your financial situation. So, what's the real difference between the two?
- A home equity loan provides the borrower with a single lump sum of money at a fixed rate with a fixed monthly payment.
- A home equity line of credit (HELOC) creates a revolving line of credit that the borrower can draw upon continuously and then pay it back as needed. A home equity line of credit is similar to having a credit card, but typically with a lower variable rate. Because the rate varies, your monthly payment could fluctuate, depending on how much you spend.
Which is Right for You?
A HELOC might be better if
- You have good to excellent credit and want a shot at getting the lowest interest rate possible
- You have a home improvement project and don't know how much the final cost will be
- You would prefer to reduce your payments during the initial part of your loan
A home equity loan might be better if
- You know the exact amount you need to borrow.
- Fixed monthly payments allow you to budget better.
- You prefer to have a fixed interest rate on your loan.
Reasons to use a home equity
- Home improvement
- College costs
- Debt consolidation
- Emergency expenses
- Wedding expenses
- Business expenses
Crunch the numbers with a home equity loan vs line of credit comparison calculator to help you choose the best home equity loan option for your lifestyle.
How To Get a Home Equity Loan or Line of Credit
Run the numbers and make sure that you can afford to pay your mortgage on top of a new home equity loan. If the answer is yes, then a home equity loan is a solid plan for improving your finances.
