Is a Credit Line better than a Home Equity Loan

If you are thinking of making improvements or looking for money to pay for your child’s college education you may be considering taking advantage of the equity in your home. Equity is the difference between the market value of your home and the amount you owe on your mortgage. Many lenders will lend you up to 85 percent of the equity in your home. There are two vehicles to borrow the equity in your home, a home equity loan or a line of credit. Each has pros and cons, it is important to shop around and do research to determine which is better for you.

With a home equity loan you get a one-time lump sum that is paid off over a set amount of time. It has a fixed interest rate and the same payments each month.  Once you get the money, you cannot borrow further from the loan.

With a line of credit you can borrow up to a certain amount for the life of the loan.  Instead of receiving a lump sum, you can withdraw money as you need it. As you pay off the principal, your credit revolves and you can use it again. Lines of credit have a variable interest rate that fluctuates over the life of the loan. Payments vary depending on the interest rate and how much credit you have used. When the line of credit has expired everything must be paid off, you may be allowed a renewal for extra time.

Lines of credit are accessed by checks or a credit card. You may be required to take an initial advance when you set up the loan, withdraw a minimum amount each time you make a withdrawal and keep a minimum amount outstanding throughout the life of the line of credit.

A line of credit may give you more flexibility than a home equity loan. You don’t need to borrow the entire amount if you don’t need it unlike with a home equity loan. You can borrow more once you have paid off a portion of it; this is unlike a home equity loan which you can only borrow from once.

When considering borrowing from the equity in your home, it is important to shop around and do research since you are putting your home on the line. If something happens and you cannot make the payments, you may be forced to put your home up for sale to pay back the loan. Deciding whether a home equity loan or line of credit is best for you depends on your individual circumstances.