Home Equity Loan vs. Home Equity Line of Credit
Home equity loan and Home Equity line of credit basically means that you, the homeowner, can borrow money against the value of your house. Both are, in essence, a second mortgage. Borrowers offer their home as collateral to loan providers.
What is equity?
Equity basically is the value of your home minus your debts. If the market value of your home rises, so does its equity. Likewise, if your debts are much lower than your home's market value, equity also increases. The amount a homeowner can borrow depends on his/her home's market value less outstanding liabilities. The lenders would then arrive at the difference of the two called the net worth and base their offer on that.
What is the difference?
Equity line of credit's function is basically like that of having a credit card. You can draw up funds as the need for it arises, at a predetermined limit. Payment is basically the same, a minimum payment each month (interest) and the option to pay up as much of the amount as you like. With the equity loan, you will receive a lump sum which will be paid off on a fixed monthly payment over a predetermined period of time. With both, the determining factors (for the amount or line) is your salary, debts, value of your home, amount you still owe on a mortgage, and credit history.
Equity Loan vs. Equity Line of Credit
Both an equity loan and an equity line of credit have their advantages and disadvantages.
Equity Loan | Equity Line of Credit | |
Benefits: | lowest monthly payments of all loans | Fixed rate and payments |
Receipt of Funds: | As you need it | Lump Sum upfront |
Payment: | minimum payment each month; option to pay up as much of the amount as you like | fixed monthly payment over a predetermined period of time |
Interest rates: | Depends on the amount borrowed - fixed margin, varies with prime rate | Fixed rate (depending on predetermined length of payment period, fixed rate can go lower or higher) |
Which is more appropriate for you?
You have to consider two factors on deciding which type of loan to avail. First, when do you need the money? Second, what do you need it for?
If you need the money for a project that will go on for a certain period of time and you are not sure how much you will need, then it would be best to apply for a home equity line of credit.
For example, you will be needing money for home improvements and the kids are going to college. You will be needing money occasionally for both needs. Since you are not sure of the time span and the amount you will need, it would be best to apply for an equity line of credit.
If you need the money at a specific time and already know, or at least have some idea of the amount you'll be needing, then it would be advisable for you to avail of a home equity loan.
For example, you need money right away for debt consolidation and you already know the amount you'll be needing, then a home equity loan is the most appropriate for your need.