April 27, 2009
Home Equity Loan vs Line of Credit
Comparing a home equity loan vs. line of credit can be tricky. Many people do not understand the difference, but knowing which option would work best for you could end up saving you quite a bit of money. These two options are very similar, but have key differences that could affect how useful they are to your particular situation. Read the information below to learn which option can best serve you.
When you compare a home equity loan vs. line of credit, the first step is to understand the definition of a home equity loan. A home equity loan is a loan that is given based on the equity of your home. As you pay off your mortgage you build equity in your home that you can later borrow against. A home equity loan allows you to receive that equity in a large lump sum at closing, and use it in any way you choose.
A line of credit is very similar to a home equity loan, in the fact that it also allows you to borrow from your home equity. However, when comparing a home equity loan vs. line of credit there is one major difference. A line of credit does not give you a large lump sum of money, but rather lets you borrow a little at a time as you need it, sort of like a credit card.
Home equity loans usually last for 15 years, and the money is accessible right away in a large amount. The rates of the loans are fixed, so payments are predictable and there are no penalties for prepayment. A line of credit has an average length of 10 years, but with a variable rate that can change often, many homeowners find themselves rushing to repay the money to avoid an increase in rates.
The greatest benefit of a line of credit is that it allows you to only have to pay on what you use. With a home equity loan you may not always need all of the money you get, but you must make payments on the whole lump sum. With a line of credit, you take only what you need, and make payments based on that amount.
When it comes to a home equity loan vs. line of credit, how do you know which will work best for you. If you need a lot of money all at once to pay down debts or to conduct a large repair project on your home, then you may want to opt for a home equity loan which will allow you to receive a lump sum payment.
If you are unsure of how much money you need, as can be the case when you want to take a vacation or start your own business, then it might be more beneficial for you to use a line of credit. With a line of credit you will not have to borrow more than you need, and so will not have to make payments on the unneeded amount of money.
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