Should you get a home equity loan or a home equity line of credit?

Understand how they differ, so you can make the choice that’s right for you.

You may be able to access funds you didn’t realize you had in the form of a home equity loan or line of credit, provided you have some equity in your home.

What is home equity?

Your home equity is the difference between your home’s market value and what you owe on your mortgage. Adding equity means adding value to what you already have.

To calculate your home's current equity, subtract the amount you owe on your mortgage from the amount your home is worth. For example, if you purchased your home for $300,000, and you owe $100,000 on your mortgage loan, you have $200,000 in equity. That amount will steadily rise as you make your mortgage payment each month, but you can also add equity if the value of your home goes up for another reason. One of the easiest ways to add value is through home improvement projects.

Often, banks will let you tap a portion of your equity to withdraw cash. There are two different ways you can do this: via a home equity loan or through a home equity line of credit (HELOC).

What is a home equity loan?

It’s a lump-sum loan using your home as collateral. It’s sometimes called a “second mortgage,” since it works the same way as a traditional mortgage: You take out a predetermined amount at a fixed interest rate. As soon as you receive the money, you are expected to start paying it back in monthly installments, based on a set schedule.

Advantages of a home equity loan:

• It offers a fixed, competitive interest rate on your debt.
• The loan can be used to consolidate other, more expensive types of debt.
• Major renovations often require large upfront payments.
• The repayment schedule is predictable and easy to budget for.
• There is the potential to deduct the interest on your tax returns.

What is a home equity line of credit?

It’s like a credit card, using your home as collateral. You are extended credit up to a certain amount. You can spend as much (or as little) as is available to you, using checks or a credit card. If you do draw on your account, you don’t have to pay it back in full right away. But, for the amount you don’t pay back, you have to pay interest.

If you’re still unclear on what a home equity line of credit is, it functions as a variable rate-and-amount loan, where you have some control over the repayment schedule.

Advantages of a HELOC:

• It’s a revolving line of credit with a far lower interest rate than a credit card.
• If you have a fluctuating or uncertain income, you’ll be able to adjust the size of your debt based on your needs.
• If you’re doing a series of smaller renovation projects, you can make payments as you go.
• You have some control over the repayment schedule.
• There is the potential to deduct the interest on your tax returns.

The risk of borrowing against your home

What are home equity lines of credit and home equity loans? Both home equity lines of credit and home equity loans are loans secured by your home. This means that if you can’t pay back your obligation, you could put your home at risk. So, borrow only what you need and have a secure repayment plan in place.

Ready to see how much equity you might have? Check out our home equity calculator to get an estimate today.