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Mason City, IA 50401

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Home Blog The Difference Between a Home Equity Loan and a Line of Credit

The Difference Between a Home Equity Loan and a Line of Credit

 
The Difference Between a Home Equity Loan and a Line of Credit

Owning your own home has many benefits that can set you up for a healthy financial return. Take your home equity for example. Home equity is the difference between the value of your home and the remaining unpaid principal balance of your mortgage. For example, a home worth $250,000 with a principal balance of $100,000 remaining has $150,000 in equity.

Borrowing against your home’s equity could free up cash for a variety of purposes. You might use the money to:

  • Finance a home-improvement project
  • Consolidate your debt 
  • Cover emergency expenses 
  • Help pay for education tuition and fees
  • Take a dream vacation

Two common ways to tap into your home’s equity include a home equity loan or a home equity line of credit (HELOC). When selecting which one to go with, you’ll want to understand the differences between these personal financing options.

A home equity loan (also known as a closed-end second mortgage) is a more traditional loan. The main difference being you receive all of the money in one lump sum.

Home equity loans are most useful in the following situations:

  • You have a project in mind. If you have a distinct spending need, being able to withdraw a lump sum at a fixed interest rate is helpful.
  • You want a fixed interest rate. If variable interest makes you antsy, a home equity loan offers predictability with a set term, interest rate, and fixed monthly payment.
  • You want to consolidate debt. If you’re looking to combine several monthly debt payments into one payment at a fixed rate, a home equity loan can allow you to do this.

A HELOC is a revolving credit line, similar to a credit card. You have a certain amount of money available to borrow and pay back over time. Usually, there is a variable interest rate but that rate is often much lower.


HELOCs are better suited to the following uses:

  • You’re doing a home improvement project in stages. If you’ll need a large sum of money, but you won’t need it all at once—such as a home renovation that happens in pieces—a HELOC may be the better choice since you can borrow the money as needed.
  • You aren’t sure how much money you need. If you have a cash need—or the potential for a cash need—but you aren’t sure of the total amount, a HELOC gives you more flexibility.
  • You need a safety net. Entrepreneurs and small business owners sometimes open a home equity line of credit as an extra emergency fund in case they find themselves in a tight spot—because once you’re in the tight spot, borrowing money isn’t always easy.

Both home equity loans and HELOCs are effective ways to leverage the equity in your home. We’d love to help you determine which option is right for you. Give us a call at 800-423-1602 or stop by any First Citizens location today to speak with a Home Loan Lender.

Ready to apply for your loan? Click here to begin the process.

 

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