Home Equity Loan Line Of Credit Vs Home Equity Loan - 3 Differences

As a homeowner, you may have home equity. This essentially means that you owe less mortgage payments than your home is worth. If your current outstanding mortgage balance is 80% or less of your home's value, you can borrow against some of that equity. You could use the cash to pay down high-interest debt, medical bills, remodel your home etc.


In terms of converting parts of your home equity to cash, you basically have two main options: a standard home equity loan or a home equity line of credit. Each of these can be very desirable options, but each is appropriate for different situations. By understanding which type of loan is appropriate in which type of case, you can choose which type of loan is right for you.
If you are keen on obtaining a loan against the equity in your home, you need to know your options. Here are 3 differences between a home equity loan line of credit (LOC) and a home equity loan:


1. Getting money as you go versus getting a lump-sum
A home equity line of credit is ideal when you are unsure of how much you will need to borrow or when. It operates somewhat like a checking account that you can borrow against as you need it - up to a certain amount. For example, if you plan to do some home improvements over a period of time, you may want to borrow a bit at a time.
Conversely, a home equity loan is perfect when you know ahead of time how much you want to borrow. You apply for the loan and get it as a single lump sum.


2. Getting variable interest rate versus fixed interest rate
For most equity line of credit (LOC) loans, the loan's interest rate is variable. Normally, the rate is calculated as the Prime Rate plus a margin, depending on your loan to value (LTV). Normally, there is a cap or maximum rate put in place to protect you in case the Prime Rate goes up significantly during your repayment period.
By contrast, with a standard equity loan, you pay a fixed interest rate already determined before the time of the loan closing.
In both cases, your interest rate will be higher than the rate you pay on your existing first mortgage but it will be lower than the rate you would pay if you were to take out an unsecured loan like borrowing against a credit card.


3. Making variable payments versus fixed payments
With a line of credit your outstanding balance will vary over time and thus your repayment amounts vary. By contrast, your loan fees on an equity loan will be fixed from month to month.


By taking these 3 differences into account, you get to pick the type of loan right for you.