Home Equity Line of Credit VS Home Equity Loan

A home equity line of credit allows you to draw funds, up to a predetermined limit, whenever you need money. There is generally a minimum payment due each month, with the option to pay off as much of the line as you want. The way that you draw and repay funds for a HELOC is similar to the way you draw and repay funds for other revolving lines of credit, such as a credit card.

With a home equity loan, you receive a lump sum of money and have a fixed monthly payment that you pay off over a predetermined time period. In each case, the amount you can borrow is based on factors such as your income, debts, the value of your home, how much you still owe on your mortgage and your credit history.

Benefits
The appeal of both of these types of loans is their interest rates, which are almost always lower than those of credit cards or conventional bank loans because they are secured against your home. In addition, the interest you pay on a home equity line or loan is often tax deductible (consult a tax advisor about your particular situation).

Which is best for you?
Generally, a home equity line of credit is a good choice to meet ongoing cash needs, such as college tuition payments or medical bills. A home equity loan is more suitable when you need money for a specific, one-time purpose, such as buying a car or a major renovation.

Comparing the costs
Both HELOCs and HELs usually carry a higher interest rate than that of a first mortgage. With a HEL, you may choose either an adjustable rate that fluctuates according to variations in the prime rate, or you may opt for a fixed rate. A fixed rate enables you to budget a set payment monthly without worrying about increasing costs should interest rates rise. With a HEL, there are also closing costs that you should consider.

A home equity line of credit usually carries a lower initial interest rate than a home equity loan, but its rate fluctuates according to the prime rate, so there is more interest rate risk. Unlike a HEL, where your monthly payments are a set amount, a HELOC enables you to borrow funds as needed and repay as little as interest only each month. In addition, there are generally no closing costs when you open a HELOC.

Keep in mind, your home is the collateral for both a HELOC and a HEL. If a HELOC’s easy access to cash tempts you to run up more debt than you can repay, or if you fail to make your payments, you risk losing your house.