Mortgage / Equity

Home Equity
Home Equity Loan vs. Line of Credit

A home equity line of credit (HELOC) is usually a better deal for a homeowner than a home equity loan.

The interest on the two methods of finance is about the same but the home equity line of credit is usually more flexible and easier to take advantage of. A home equity loan is a onetime payment of money from a lender to a home owner that is secured by home equity. The homeowner can take advantage of a loan only once and will have to borrow a specific amount of money.

In contrast a HELOC is an agreement between the lender and the homeowner. The agreement gives the homeowner the right to use a specific amount of credit that is secured by home equity. The homeowner can use all of this credit or a portion of it if they wish.

Advantages to Line of Credit 

The biggest advantage to a home equity line of credit is that the home owner will be able to access it in the future. Even if the homeowner pays off the line of credit they will be able to use it again in the future.

This means that the homeowner has a source of credit they can tap into at any time. This can be used for emergency purposes such as home repairs, remodeling or to pay off other consumer credit.

Another big advantage to a home equity line of credit is that the interest rates on such lines of credit are usually much lower than those for other kinds of consumer credit such as car loans. This means a homeowner will be able to borrow money and pay less to do so.

In some cases a home equity line of credit may also be tax deductible. This could lead to further savings for some home owners.

Drawbacks to Home Equity Loans and Lines of Credit

The biggest drawback to a home equity line of credit is the same drawback you’ll face with a home equity loan. Every time you use a HELOC or a home equity loan you add debt to your home.

This decreases the home’s equity which the difference between the amount of debt on the home and its value. This will make it harder to borrow money against the home in the future.

Increasing the debt on a home always increases the risk of foreclosure. It also decreases the amount of money you’ll have on hand in the future because you’ll have to pay off the money you borrowed.

A homeowner should never use a HELOC or take out a home equity loan unless they know they will have the money to pay it off.

When a Loan Might Be Better

There are also some cases in which the loan is the better choice for the home owner. If the homeowner only needs a specific amount of money and the interest rate on a loan is lower than that on a HELOC the home loan is a better deal.

A home equity loan might also be a better deal if the home owner has other sources of income or credit to cover unforeseen costs available. In such a situation there might be no need for a source of credit in the future.