Home Equity: Loan or Credit?

Allison Beatty
LoanBiz Columnist

Deciding Between a Home Equity Loan and Line of Credit

Wondering about financing or refinancing to build your dream kitchen? There are many loan options, including the popular home equity financing, to fund your renovation. A home equity loan or line of credit can help you tap into your home’s appreciated value to pay for a variety of expenses.

Possible Uses for Home Equity Financing

Among the many possible uses for home equity financing are:

• Home improvements--from major kitchen projects to smaller roof repairs.
• Educational expenses--from full-time college expenses to occasional classes at a local community college.
• Debt consolidation. If you have debts from high interest credit cards, consider refinancing them with a lower home equity rate.

Home Equity Loan Features

Home equity loans and lines of credit are similar in that:

• Each financing is a second mortgage on your home.
• Each mortgage loan often can be completed in 10 to 14 days.
• Each mortgage may be tax deductible. (See your financial advisor for details).

Among the key differences are the terms for repayment. A home equity loan is a loan for a set amount, with a set payment schedule. There may be a prepayment penalty. Conversely, some banks offer you a lower rate if you have the payment automatically deducted from your checking account.

Home Equity Line of Credit Offers Flexibility

A home equity line of credit is similar to a credit card, yet it carries more flexibility and a lower interest rate. One advantage is the ability to pay off as much as you want each month. As you start new projects, you access the line of credit to pay for the work.

There are pros and cons to each type of financing. By understanding how a home equity loan or line of credit works, you can determine which type of financing meets your needs.

About the Author
Allison E. Beatty is a syndicated real estate writer who has been writing home improvement columns for 15 years.