Home Equity Loan vs. Line of Credit – Which One Should You Choose

One of the best things about owning your own home is the equity you build up over time. As your home increases in value, you can borrow against the difference between what you owe and what it’s currently worth.

If you need access to cash, there are a couple different options available: a home equity loan and a line of credit. Here’s a quick rundown of what some of the differences, advantages and disadvantages.

What is a home equity line of credit (HELOC)?

A HELOC functions similar to a credit card. You’re given a set limit that you can borrow against as you need to. You can tap into that for whatever amount you need up to the limit. So, you could borrow $1,000 now, $3,000 a few months from now and another $5,000 down the road.

The interest rate on a HELOC is usually variable, which means it will fluctuate with the market. The interest you pay (up to $100k) is tax deductible, regardless of what you use the money for.

Payments are interest only during the “draw period,” which is the first five or 10 years. Payments including both principal and interest are due during the repayment period, typically 10 – 20 years following the draw period.

What is a home equity loan?

Home equity loans are similar to HELOCs in that they both let you borrow against the equity of your home. That’s pretty much where the similarities end, though. Unlike a HELOC, an equity loan is paid out to you in full in one lump sum. The interest is typically set at a fixed rate and payments of principal and interest are due throughout the life of the loan.

Home equity loans are often a better option for people who just need money for one large project, to pay down debt, or make investments. If you are the type that would be tempted to tap into a HELOC’s cash beyond what you truly need, a loan may be a better fit. Additionally, knowing the loan terms in advance (fixed rate and payments) can be better for managing your budget.

HELOC Advantages

• Flexibility
• Low interest rate typically
• Interest-only payments (during the draw period)
• Tax benefits

HELOC Disadvantages

• Harder to budget for
• Variable interest rates
• Require discipline
• Fees

Home Equity Loan Advantages

• Low interest
• Predictable payments
• Tax benefits

Home Equity Loan Disadvantages

• Costs and fees
• Cycle of debt

Ultimately, choosing which option is right for you will depend on your unique needs and circumstances. The best way to start is by speaking to an expert. We’d be happy to chat with you about your options and help you make a more informed decision. Get in touch today!