Home Equity Loan vs. Home Equity Line of Credit

If you own a home, you have the potential to obtain a low-interest loan that may also offer tax advantages. Interest on home equity loans is generally tax deductible.

So tapping into your home equity may be a good way to obtain a loan.

The two options are a home equity loan, and a home equity line of credit.

Lenders have developed a number of financing solutions for you, each with their own pros and cons. Home equity loans provide low rates with some closing costs. On the other hand, a home equity line of credit waives closing costs and application fees for flexible lending amounts at slightly higher rates.

Home Equity Loan

For homeowners desiring to borrow a large lump-sum amount of money and take several years to pay it back, a home equity loan provides the best option. They usually offer the lowest fixed-rate interest loan, and terms can be selected to result in a reasonable monthly payment. Home equity loans usually don’t have early pay-off fees. They are typically structured like a regular mortgages, where interest is primarily paid at the beginning of the loan period.

Home equity loans are usually best for home improvements, consolidating other debts, or other major expenses.

Home Equity Line Of Credit

A home equity line of credit allows a homeowner to borrow amounts when needed, similar to a credit card. A predetermined credit limit is established, and then the borrower has the flexibility of drawing out funds as needed. As the balance is paid off, additional funds can be borrowed up to the original limit. Interest is only paid on the amount borrowed. Usually, the minimum payment covers only the interest charged for that month. A line of credit usually doesn’t have application fees. But there may be fees for carry a minimum balance or closing the account early.

Home equity line of credit is best for short-term financing. Interest payments can be kept to a minimum by paying off balances early.

Get the Best Deal

Regardless of which type of financing you choose, make sure you compare several lenders to get the best deal on rates and fees.