Home Equity Loans vs. Lines of Credit

A homeowner has the option of financing large investments such as home improvements or a child’s college education by tapping into his or her home’s equity. A person can calculate his or her available home equity by finding the difference between the market value of the house and the amount left on his or her mortgage. Once the home equity value is determined, a homeowner can receive this financing by taking out a home equity loan or by establishing a home equity credit line.

Home Equity Loan

When a person sets up a home equity loan, his or her lender will provide the total loan amount upfront. Generally, homeowners are only able to borrow 85% of the total equity left in their homes. Once the loan is taken out, the homeowner repays this debt through equal monthly payments over a fixed loan term, similar to an original mortgage agreement. If the homeowner fails to make these payments, his or her lender can legally foreclose on the home. If a person is considering a home equity loan, he or she should talk to different lenders and compare application fees, origination fees, and lending fees.

Home Equity Lines of Credit

Home equity lines of credit function more like credit cards, as they offer a revolving line of credit. Homeowners who take out home equity lines of credit can borrow the amount they need at any point by simply writing a check or using a credit card that is connected to the account. However, homeowners are not able to exceed their credit limits. Homeowners are also restricted to making payments on the amount that they actually borrow as opposed to the entire home equity. Similar to home equity loans, people who use home equity lines of credit pledge their houses as collateral for the loan.