Differences Between Home Equity Loans and Line of Credit

When comparing home equity loans with home equity lines of credit, you will be presented with several key differences. While they both help you accomplish the end goal of tapping your equity, they go about it in two completely different ways. They both have merit and they both have their drawbacks as well. Here are a few things to consider on a home equity loan and a line of credit.

Home Equity Loans

  • Initial disbursement- When you take out a home equity loan, you are given the entire amount of money upfront. Therefore, if you get a $30,000 home equity loan, all $30,000 will be handed to you at closing. If you only use $27,000 of the money, the loan will be amortized to a $30,000 amount. 
  • Fixed payment plan- With a home equity loan, you will have a fixed payment plan over the life of the loan. As soon as you are given the money, the repayment period begins. You have to start making payments the very next month. If you have a fixed rate home equity loan, the payment will be the same throughout the entire loan period. Therefore, it can be easier to budget for in the long run.
  • Lower rates- Typically you can get a lower interest rate on a home equity loan than you can with a line of credit. Therefore if you want the most inexpensive option, this is probably going to be your best choice. 

Home Equity Line of Credit

  • Initial disbursement- With a home equity line of credit, there is no set amount of money that you have to borrow. If you get a $30,000 line of credit, you do not necessarily have to use it. Depending on the program, you might have to borrow a certain amount of money as an initial draw. However, after that you can borrow whatever you want.
  • Flexibility- With a line of credit, you can take out the money when you need it. With this ability, it is a great program to have for people that wish to have a source of easily accessible emergency funds. If you need the money for something, you can just borrow it immediately without waiting on an approval process.
  • Easily accessible- The funds from your home equity line of credit are typically very easy to access. Most programs will give you a checkbook or a debit card to draw on the account. This way you can access the funds whenever and wherever you want. 
  • Draw period- The first part of the home equity line of credit process is known as the draw period. During this period, you can borrow as much money as you want as long as you stay below the credit limit. During this time period, you can choose to make regular payments if you wish. However, after the draw period is up, you have to start repaying the loan and you can no longer borrow money. 
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