Home Equity Loan Line Of Credit vs. Home Equity Loan – 3 Differences

Home Equity Loan Line Of Credit vs

Home Equity Loan Line Of Credit vs. Home Equity Loan 3 Differences

As a homeowner, you may have equity in your home. This means, essentially, that you owe less on your mortgage(s) than your home is worth. If your current outstanding mortgage balance is 80% or less of your home's value, you will likely be able to borrow against some of that equity. You could use the cash to pay down high-interest debt, pay medical bills, remodel your home, etc.

In terms of converting some of your home equity to cash, you essentially have two main options: either a standard home equity loan or a home equity line of credit. Each of these can be very desirable options, but each is appropriate for different situations. By understanding which type of loan is appropriate in which type of situation, you can decide which type of loan is right for you.

If you are interested in getting a loan against the equity in your home, you need to know your options. Here are 3 differences between a home equity loan line of credit (LOC) and a home equity loan:

1. Get money as you go versus get a lump-sum payment:

A home equity line of credit is ideal when you are not exactly sure how much you will need to end up borrowing or when. It works a bit like a checking account that you can borrow against as you need it up to a certain amount. For example, if you plan to do some home improvements over a period of time, you may want to borrow a bit at a time.

On the other hand, a home equity loan is ideal when you know in advance how much you will want to borrow. You apply for the loan and get it funded as a single lump sum.

2. Get a variable interest rate versus a fixed interest rate:

In the case of most equity line of credit (LOC) loans, your loan's interest rate will be variable. Usually, the rate is calculated as the Prime Rate plus a margin, depending on your loan to value (LTV). Usually, there is a cap or maximum rate, put in place to protect you in case the Prime Rate goes up significantly during your repayment period.

By contrast, with a standard equity loan, you will likely pay a fixed interest rate which is determined at the time of the loan closing. In both cases, your interest rate will be higher than the rate you pay on your existing first mortgage. Yet, it will be lower than the rate you would pay if you were to take out an unsecured loan, such as borrowing against a credit card.

3. Make variable payments versus fixed payments:

Similarly, with a line of credit your outstanding balance (the amount you owe to the lender at any given time) will vary over time and thus your repayment amounts will vary. By contrast, your loan payments on an equity loan will be fixed from month to month.

Take these 3 differences into account as you decide which type of loan is right for you.

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