The Difference Between a Home Equity Loan and a Home Equity Line of Credit

If you have built up some equity in your home, you might be thinking of using it to your advantage by getting money for home improvements, debt consolidation or other reasons. There are two main choices when it comes to taking advantage of the equity in your home: a "regular" home equity loan or a home equity line of credit (HELOC). Each of these has its unique features and advantages.

"Regular" home equity loan

A home equity loan is one in which you borrow against the ownership you have in your home (read my post on equity here). A home equity loan is very similar to other loans in that the lender gives you a lump sum, expecting repayment plus interest and other fees. Because the home equity loan is secured by your home, though, it is important to be careful not to borrow too much, or let a lender pressure you into borrowing more than your home is worth. Many people find that home equity loans are convenient for debt consolidation, paying for education expenses not covered by federal aid and paying for weddings, as the interest rate is often lower, and usually tax-deductible.

Home equity line of credit

A home equity line of credit is really another type of home equity loan. However, a HELOC is considered a revolving credit account. It works rather like a credit card: you can borrow money, and as you pay it down, you can borrow more. A HELOC comes with a limit that usually corresponds somewhat to the equity you have in your home. Money from a home equity line of credit is fairly accessible. You do not have to apply for a new loan to get more money out if you need more than you thought you did. However, you do have to stay within your limit. The interest rate on a HELOC is likely to be slightly higher than a more conventional home equity loan, and it is more likely to be variable, although you can get a fixed rate home equity line of credit. Like a regular home equity loan, the HELOC often has tax-deductible interest payments.

A HELOC is most convenient for those working on home improvements. Because of the nature of major remodeling or improvement projects, things can easily cost more or less (usually more) than you thought. A home equity line of credit makes it easier for you to borrow money as you need it, without having to wait for approval on another loan. However, it can be tempting to take out more than you need, due to the accessible nature of your equity line. Make sure that you carefully monitor your spending and keep a lid on it.

Remember: it´s still a loan

Carefully consider what you want a home equity loan for. While it can be convenient, and it is usually easier, to get a loan secured by the equity in your home, you need to be aware that you could lose your home if you are unable to make the payments. If you do not need to borrow the entire amount of equity in your home to accomplish your goals, do not let a lender talk you into it. It´s always better to borrow just as much as you need rather than borrowing a little extra.