Which is Better – Home Loan or Equity Line of Credit? Your Questions Answered

What is a Home Equity Loan?

Your Home

A home equity loan is a loan that you take against the equity in your house. Assume, for example, that you have a house valued at $150,000 and you only owe $100,000 on it. You have $50,000 worth of equity or value in that house. Sometimes, you want to take that money out. You may need it to pay bills or pay off high interest debt or pay for a remodel or a vacation. While there are both good and bad reasons for taking out a home equity loan, in general, the premise is the same every time. You apply for the loan and the bank gives you the entire amount of money you applied for all at once in one lump sum. So, if you applied for that $50,000 in equity, you leave the bank with a check for $50,000 at settlement.

What is a Home Equity Line of Credit?

A home equity line of credit is similar to a home equity loan in the sense that you get to take equity out of your home. The difference is, you are granted a line of credit based on that equity. This means that you don’t leave the bank with that $50,000 check in one lump sum. Instead, you are given a $50,000 line of credit that you can borrow and draw from as you want to. Much like a secured credit card, you can borrow as much or as little as you want at any given time, up to your credit limit. So, which is better home loan or equity line of credit?

Comparing Home Equity Loan vs. Home Equity Line of Credit

Comparing home equity loan versus home equity line of credit is thus essential if you want to get the equity out of your home. There are several advantages and disadvantages to each that need to be considered in determining which is better home loan or equity line of credit.

For a home equity loan:

  • You get the money all at once, and you can do anything you want with it. It is yours, and the bank can’t take it away.
  • The disadvantages are that you may have higher payments since you are automatically borrowing the full amount- if you can’t make those high payments, you may find yourself facing foreclosure.

With a home equity line of credit:

  • You get freedom and flexibility. Sometimes, you even get a credit or debit card to use to get the money out. This means you aren’t borrowing more than you need at any given time.
  • The major disadvantage is that the bank can take away your line of credit. This may happen if you become a worse credit risk, for example. Depending on how long the line of credit is granted for, this can also put you at risk because if you are counting on borrowing that money and the bank pulls your line of credit, you’ll be left without the ability to get access to the cash.

What to Choose?

The right choosing when comparing which is better home loan or equity line of credit depends on your situation. If you only need to have access to some of your equity or may want to borrow more or less at different times, the flexibility of a home equity line of credit may be right for you. If you want to make sure the bank can’t pull your credit line, a home equity loan may be best.