Home Equity Loan Versus Line of Credit: Which Do You Choose?

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By Kristina Lockridge

 

If you’ve been considering home renovations or you’re preparing for another type of major purchase, leveraging the equity in your home could be a great option. However, you may be asking yourself if you should get a Home Equity Loan or opt for a Home Equity Line of Credit (HELOC) to assist with funding.

There are pros and cons to both you should consider, and ultimately you should use all of the information available to you from your lender to make the best decision for your specific situation.

Perhaps the largest difference in a Home Equity Loan and a HELOC is that the standard Home Equity Loan gives you a one-time lump sum to then pay back at a fixed interest rate over a period of time (usually anywhere from 5 to 15 years). A HELOC allows you to draw on the funds you’ve been approved for as needed, and while that may seem like an immediate advantage, most HELOCs have an adjustable interest rate, meaning it could rise or fall, creating an unpredictable monthly payment for you (similar to a credit card).

Some lenders, like Generations FCU, offer a fixed rate line of credit so you can avoid any uncertainty with your payment amount each month.

HELOCs also start with a 10-year term, unlike a standard Home Equity Loan that has a 5-year term option available. However, lines of credit do allow an interest-only payment option, allowing you to make payments toward the loan interest only for the first 5 years.

Comparing Home Equity Loans and HELOCs
Home Equity Loan Home Equity Line of Credit (HELOC)
Lump Sum
Draw Money As Needed
Adjustable Interest Rate
Fixed Interest Rate
(Some lenders, like GFCU, allow a fixed rate)
Pay Interest Only On Amount Drawn
Interest-Only Payment Option


So which one is right for you?
Ultimately, you must look at your specific situation to determine what will work best for you and your budget. How much money do you really need and how do you plan to use it? Terms and details of home equity loans and lines of credit will vary from one lender to the next. Be sure you understand all of those details and the repayment terms of the loan you’d like before committing.

If you’d like to learn more about a Generations FCU Home Equity Loan or Line of Credit, give one of our Home Loan Specialists a call at 210-230-9380.