Home Equity Loan or Line of Credit: Which Is Best for Me?

Large, unexpected expenses like procedures not covered by medical insurance or home repairs can leave consumers in a cash crunch. But if you are a homeowner and  have equity in your home, a home equity loan may be just the trick to help you get back on your feet.  But when you talk to a home equity lender, you’ll learn that there are really two types of equity loans: a home equity loan and a home equity line of credit.

Though both products are similar, they have their differences.  Consider these five questions when making a determination on which product is right for you:

1. Do I need a lump sum payout?

If you are facing a large one-time expense, a home equity loan is likely your best option. You can borrow only what you need and pay interest only on the borrowed amount.  On the other hand, if you don’t have anything planned, a home equity line of credit will allow you to establish a credit line based on your home’s available equity.  You can draw on this line of credit as you wish and interest only accrues when there is an outstanding balance.

2. Do I need flexible payments?

A home equity loan is going to come with a fixed monthly payment usually amortized over a 10 year period.  If you are unsure whether you would be able to afford this payment month in and month out, a home equity line of credit might offer more flexibility.  Most lines of credit have an interest only option meaning that you only have to pay towards the interest each month, but are not required to make principal payments.  In this way they are much more flexible than a home equity loan.

3. Can I be responsible with this money?

If your past track record proves that you are irresponsible with your money, then a home equity loan is probably safer.  Reason being you have a fixed payment, and there’s not a credit line that you can draw on as needed.  A line of credit sometimes makes it too easy to get into trouble buying items you wouldn’t otherwise be able to afford.

4. Do I want a fixed rate?

Most home equity loans offer a fixed interest rate, which helps with budgeting since you always know how much your payment will be.  Whereas, a home equity line of credit will feature a variable interest rate, which can be adjusted up or down as the benchmark rate changes.  If interest rates are low, it’s a wise idea to lock in a fixed rate with a home equity loan.  By the same token if interest rates are high and you feel like they can only come down, a line of credit should offer a lower payment over time.

Before making a decision be sure to get home equity loan information from several home equity lenders.  You definitely don’t want to go with the first option that comes your way.

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