Home Equity Loan or Line of Credit?
You may have heard the terms home equity loan and line of credit, but what do they mean? How do you begin to choose between these two options? While they both let you use your home as collateral to give you access to money, they each have unique structures. The main difference between a home equity loan and a line of credit is that a home equity loan provides you the entire amount upfront, whereas a line of credit lets you draw money when needed.
The best option for you will depend on what you need the money for, your financial situation, your budget and how much you can comfortably afford to pay back.
Home Equity Loan vs. Line of Credit
When you have a mortgage on your home, sometimes home equity loans and lines of credit are called second mortgages. You can have a mortgage loan outstanding and take out a home equity loan or line of credit when you need more funds by using your home equity. The difference between your outstanding mortgage loan amount(s) and the current market value of your home gives you “equity”. Equity is the portion of your home you own that's debt-free.
So why choose a home equity loan or a line of credit? They can have better interest terms than most personal loans and credit cards, so they're a great option when you need an influx of cash for that home renovation or consolidating debt.
A home equity loan has a set number of years over which you'll make payments. After your home equity loan approval, you'll receive the entire lump sum upfront. You'll then pay it back with fixed payments of the borrowed principal amount plus interest.
A home equity line of credit allows you to borrow the approved amount anytime. Like a credit card, you can pay back the balance and then take out the money again. Your payments will vary based on how much you draw from your line and your variable interest rate.
What Is a Home Equity Loan?
You receive a lump sum to use right away from a home equity loan. You then make set monthly payments that include a fixed interest rate. Get started on the home remodel you've been dreaming about, or consolidate high interest debt. Those are some reasons why a home equity loan might be an attractive option for you.
If you prefer the certainty of knowing you pay a specific amount every month for a fixed period, a home equity loan is an excellent option for a structured financial plan. There are also flexible options available to accommodate your financial needs.
Choosing a home equity loan can provide these benefits:
- Longer repayment period: You can have several years to pay back the loan.
- Structured payments: It's easier to set and manage your budget every month when you know how much you are paying.
- Fixed interest rate: You can enjoy a predictable and stable interest rate over your loan's life.
What Is a Home Equity Line of Credit?
Have you heard of a revolving line of credit? This term applies to a home equity line of credit. You can access money up to your approved amount any time you need it. Depending on your financial needs, you can use a line of credit to fund a specific need, like repairing your property or consolidating high interest rate personal loans and credit cards.
A home equity line of credit has two periods — draw, also called borrowing, and a repayment period. During the initial draw period, you can withdraw the money that you need when you need it. Your monthly payments will be based on how much you have borrowed on your line and your interest rate. After your draw period, the repayment period starts when you'll pay back the outstanding balance. Your monthly payment will be based on the length of your repayment period, your outstanding balance and your interest rate.
A line of credit is an excellent option if you want the availability and access to money for expenses you can't predict. There are plenty of other perks a line of credit can come with such as:
- Get immediate access: You can withdraw funds whenever you need them and only pay interest on your outstanding balance.
- Choose your spending: You have control over how much or how little of the credit line you want to spend within your approved limit.
- Borrow again: Once you've paid down your balance, you still have the option to borrow the same funds again until the end of your draw period.
Which One Is Right for You?
Choosing a home equity loan or line of credit depends on your unique situation. Before making your choice, think about what you need the money for and for how long.
If you have an ongoing project and have to figure out how much you'll need, a line of credit will give you access to funds when needed. The flexibility of lines of credit can also give you peace of mind in emergencies. Keep in mind that the payments will vary because of the variable interest rate and how much you have borrowed on your line, so this option works well if you have room in your budget for changes.
When you know exactly how much money you need or when you have a big immediate expense, a home equity loan can help with a lump sum amount. The structure of fixed interest rates and fixed monthly payments may be a better option if you prefer to know exactly how much you pay each month.
Apply for a Home Equity Loan or Line of Credit
At First Commonwealth Bank, we can help you to make the best choice for your financial needs. Whether you apply for a home equity loan or a line of credit, it's important to us that you feel comfortable with your decision and that you borrow at a rate that gives you financial freedom. Our team is here to help you make the right decision, and will provide you with all of the terms related to your loan. Check out our “how much will my loan repayments be” calculator to learn more, and apply online.