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Is a Home Equity Line of Credit Right for You?

A home equity line of credit is an excellent way to cover large, indeterminate expenses, but you also have other options to consider. Here is a guide to help you decide between a traditional home equity loan and a line of credit.

What It Is

With a home equity line of credit, you get revolving credit of up to 100% of the appraised value of your home less any outstanding debts against it. You may even come across lenders that will extend a line of credit of up to 125% of your home’s value. A home equity loan, on the other hand, gives you a fixed amount of money, all of which you must pay back regardless of how much you use. Home equity loans also give you up to 100% of the value of your home minus any outstanding debts.

Qualification

To qualify for a home equity line of credit, you will need proof of home ownership, income, your mortgage loan, and how much equity have in your home. Most lenders require a home appraisal before you can qualify for a home equity line of credit. The requirements for a home equity loan are identical to those of a home equity line of credit, except that you will need to prove that you own at least 20% equity in your home.

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Repayment Structure

One appeal of the home equity line of credit is that you can make just the minimum payments required, which can be as low as interest-only payments. You can continue making minimum payments each month usually until the full payment is due, which is often made in a balloon payment. By contrast, a home equity loan requires fixed monthly payments consisting of both interest and principal. Once the loan’s term expires, it is paid in full.

Terms

A home equity line of credit usually has a 10- or 20-year draw period during which you can access the funds as you please. After the draw period, you will enter a fixed term where you must make payments on the balance and the interest. With home equity loans, the terms are finite and usually range from one to 30 years.

Receipt of Funds

With a home equity line of credit, you have the convenience of drawing the funds as needed. Usually you do so by writing special checks your lender will provide. Home equity loans, on the other hand, provide a lump-sum payment up front. Find out more information on our Frequently Asked Questions page..