Home Equity Line of Credit vs. Home Equity Loan: What’s the Difference?
One of the advantages of owning a home is that you can build up equity that can then be used to borrow money when a financial need arises. Home equity lending uses the equity in your home as collateral. If you are looking to do some work on your house, consolidate loans, or help pay for college tuition, you may want to consider taking out that “second mortgage” equity loan or line of credit. But which one is best for you? Let’s take a look.
Home Equity Line of Credit
A home equity line of credit, or HELOC, is much like a credit card providing a revolving source of funds when you need it. The standard draw period is 10 years where you can borrow as you wish. Just remember, you have to pay back whatever you borrow, plus interest. HELOCs normally have a variable interest rate which means that your monthly payment could be different each month. This option is good for multiple smaller projects that you will be doing over time or for consolidating other debt so you can avoid higher interest rates or late fees.
Home Equity Loan
A home equity loan is a lump sum to cover one-time expenses. The typical term for a home equity loan is 20 years and you can often borrow up to 80 percent of your home’s equity. Home equity loans are paid back in installments and are normally fixed interest rates, allowing you to always know your monthly payment. This option is good if you are looking to make a large, one-time expense like renovating your kitchen, adding a room, or paying for a wedding.
Deciding on whether you are in need of a home equity line of credit or home equity loan shouldn’t be taken lightly. There are many factors that need to be considered, like will you be able to make the additional monthly payments. Take the time to evaluate your finances and speak to a professional.
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