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Home Equity Loan vs. Home Equity Line of Credit

Owning a home is considered an investment because of the equity in which a homeowner will build up during the time they are living in their home. Equity is the amount in which the homeowner will receive when they sell their home. When a homeowner’s home is worth more than what the homeowner owes on their mortgage, they will have plenty of options with borrowing on the equity. The two most popular types of loans on homes are home equity loans and home equity line of credit loans. Each type of equity loan provides some advantages to the homeowner.

First off, the biggest difference between home equity loans and home equity line of credit loans is how many times the homeowner is able to borrow on their equity. For example, a traditional home equity loan is a onetime loan. The homeowner receives a loan in the amount they applied for on their equity. Home equity loans are used for debt consolidation, home improvement projects, and even purchasing an automobile. Once the homeowner receives their loan, they will be required to pay back the home equity loan in payments until the loan is paid off.

On the other hand, a home equity line of credit loan is a loan that the homeowner can use more than once. For example, if the homeowner has a home equity line of credit loan of $25,000, they can borrow that amount more than once. When the homeowner has paid back what they have borrowed on their home equity line of credit loan, they will have the option to borrow on their equity again. In other words, a home equity line of credit loan works much like a credit card. Home equity loans are closed-end loans, and home equity line of credit loans are open-end loans.

There is an advantage to a home equity line of credit loan that a traditional loan typically doesn’t offer. HELOC loans will charge interest like home equity loans, but the interest on home equity line of credit loans are tax deductible. Home equity line of credit loans offer more flexibility and options with payments than traditional home equity loans. Home equity loans will charge a principal and interest payment that will usually be at a fixed rate for a specific period of time. A home owner who wants more options with payments on their equity loan, they will choose a home equity line of credit loan.

If the homeowner is planning on only borrowing on the equity once, they should choose the traditional home equity loan. HELOC loans will also have a lower interest rate on the loan than home equity loans, which also allow the homeowner to have more options with paying off their loan. In order to determine which loan will be right for the homeowner, the homeowner should speak with a financial advisor. Homeowners should also weigh all the options with home equity loans and home equity line of credit loans.

Before a homeowner chooses a home equity loan, they should first consider how much equity they have in their home. Interest rates on home equity loans and HELOC loans should also be a major factor when deciding whether or not to use a home equity loan. A lot of homeowners are losing their equity in their home because home values are dropping, which is another factor to consider for the future. Homeowners will receive a check when approved for a home equity loan, while HELOC loans are offered as a credit card. Homeowners should plan on what they will use their equity for in order to determine which loan will work best for them.

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