Home Equity Loans vs. Lines Of Credit

Getting one's hands on an extra pile of cash has seldom been easier for homeowners than it is today, thanks to the recent deluge of home equity lending offers.

Indeed, both lines of credit and traditional home equity loans, or second mortgages, can help make planned house repairs and additions a reality.

Yet consumers should consider several things before jumping into either financing product, experts say. That's because home equity lines of credit typically are a good deal for those who want a lower up-front rate and access to money at unpredictable times. However, home equity loans are better suited to those who need a specific amount of money and payment stability.

Line of credit vs. equity loan

The most important difference is how you receive your loan funds. With a home equity line of credit, you borrow the money as needed (up to the credit limit). With a home equity loan, you get the entire loan amount right away.

See the chart below for more information.

	Home Equity Line of Credit	Home Equity Loan
Loan Funds Availability	Borrow money as you need it?up to the credit limit. Each time you pay principal it frees up that amount of your credit line for later use.	Get entire loan amount right away as a lump sum. Cannot reuse this loan.
Interest Rate	Variable rate. After the first 1 monthly billing periods, your rate varies monthly based on prime rate as published in The Wall Street Journal plus a margin.	Fixed rate. Payment stays the same for the entire term of the loan.
Payment	Varies monthly with rate and depends on how much you've borrowed against your credit line. During the 5 or 10 year draw period, you have the flexibility to pay interest only. After the draw period, your principal and interest payment vary to pay off the loan in the remaining years.	Principal and interest payment remains the same over the life of the loan.
Loan Advances	As easy as writing a check for $250 or more.	Entire balance received at once.
Rate Advantages	Lower interest rates than most unsecured credit lines (i.e., credit cards).	Low payment options available through a variety of terms.
Tax Advantages (Ask your tax advisor.)	Interest is up to 100% tax-deductible.	Interest is up to 100% tax-deductible.
Other Advantages	Good safety net for unexpected expenses or emergencies.	Excellent choice for one-time planned expenses or to consolidate debts you already have.