Home Equity Loan vs Line of Credit

Information on Home Equity Loan vs Line of Credit

A home equity line of credit can be a life saver when you have a project or a short term cash necessity, however the term (the amount of time) in which you have to pay the loan back is likely to be considerable shorter than you would get were you to take out a home equity loan instead and the interest rate is likely to be a variable rate (more on variable rates later). The most important thing you need to consider before taking out either loan is "will taking out this loan effect your ability to make your monthly payments and possibly jeopardize your home.

For this reason I would recommend that while considering the flexibility that comes with a home equity line of credit, you also consider taking out a home equity loan instead. The reason for this is that with a home equity loan you attach the sum to your already existing mortgage and the debt is spread out over a much more manageable amount of time.

In contrast, the variable rate that that applies to a home equity line of credit leaves you vulnerable to changes in the mortgage indexes (the thing that your interest rate is based on). In addition to the variable rate of a equity line, your payment is likely to balloon at the end when you need to pay off the loan in its entirety.

Before you sign any type of home loan contract that puts your home up as collateral, it is recommended that you weigh the following considerations.

1. Are you going to need the money as a single lump sum? If so than you will likely want to apply for a home equity loan.

2. Or are you looking to draw out funds over time? If so than a home equity line of credit may in fact be what you're looking for.