As a homeowner, you take pride in your space. That keeps you pretty busy.
Designing and decorating the interior to reflect your unique style. Landscaping the exterior to feel like an outdoor oasis. Cleaning, organizing, keeping everything in shape. From little fix-ups to big home improvements, you put in the effort to make your house a home.
While homeownership is rewarding, it does take a lot of effort. So why not have your home do a bit of work, too? Your house can pay you back when you extract value from it—starting with either a Home Equity Loan or Home Equity Line of Credit.
But what’s the difference? Let’s take a closer look at both options to ensure you’re making the correct choice for your financial needs.
What They Are
Home Equity Loans and Home Equity Lines of Credit let you access and take advantage of your home’s equity—while you still live there—to help you achieve your goals. But they also add to your debt.
Both draw from the value of your home and can be essentially considered “second mortgages.” Although they’re used for similar reasons, how they work is quite different.
HOME EQUITY LOAN
A Home Equity Loan is a lump sum that you receive all at once with a fixed interest rate over a fixed amount of time (term). That means your monthly payments stay the same throughout the duration of the loan.
Pro: If you can handle the cost of the fixed interest rate, consistent payments each month can make it easier to plan your finances.
Con: Accessing all your home’s equity at once can be risky if property values decrease in your neighborhood.
HOME EQUITY LINE OF CREDIT
A Home Equity Line of Credit is similar to a credit card. You borrow money as you need it from an available line of credit, and you only pay interest on the amount you take. Home Equity Lines of Credit usually have an adjustable interest rate. Our Home Equity Line of Credit Calculator can help you determine how much you can borrow.
Pro: You only pay for what you use.
Con: The variable interest rate can increase over time and result in higher monthly payments.
When to Use Them
Many financial experts will tell you that your home’s equity should only be tapped for projects or purchases that will increase its value or for emergency needs like medical expenses. Generally, some smart reasons to leverage your home’s equity are:
- Home improvements (adding an in-ground pool, updating windows, expanding a room or finishing a basement)
- Home repairs (replacing your roof or fixing your foundation)
- Home purchases (buying a new septic tank or HVAC unit)
- Medical bills
- Debt consolidation
How to Choose
Deciding between a Home Equity Loan or Home Equity Line of Credit boils down to what you want to accomplish, how much it costs and how much you really need. Be honest with yourself if using your home as collateral can help make it happen.
Remember: Before making a final decision, always calculate every financial factor including interest rates, monthly payments and fees. By weighing all the associated costs and through careful planning, you can determine if a Home Equity Loan or Line of Credit makes sense for you.