Home Equity Loans versus Lines of Credit
Buds are appearing on trees and bushes, the grass is turning green and bulbs are popping up from the soil. Best of all, the days are getting longer and the temperatures are warming up. These are a few of my favorite parts of spring. With everything coming back to life and the new growth, it’s no surprise that spring is one of the most popular times for all things home-related: home buying and selling, landscaping and home renovations.
All this excitement means that spring is also a popular season for lending options that will cover the project expenses. I’m often asked about what financing options are out there for homeowners who want to borrow against the equity of their home. This comes down to two options: home equity loans and home equity lines of credit. Here’s a look at each:
Home Equity Fixed Rate Installment Loan
A home equity loan is secured by the equity in your home, which means you receive a certain amount of money when the loan closes and pay that amount back in fixed monthly payments over a set period of time. Most banks allow you to choose multiple terms, or lengths of time to pay back the loan. This could be five, 10 or even 15 years.
Home equity fixed rate installment loans are good options in the market right now. Since home equity loans are fixed rates, you’re able to lock in a lower rate today, and you will continue to pay interest at that rate, even if the market rate increases.
Home Equity Line of Credit (HELOC)
A home equity line of credit is also credit that is borrowed against the equity of your home, but unlike the fixed rate installment loan, HELOCs use revolving credit. This means that as you pay your balance down, your monthly payment decreases and the amount you have available to borrow increases. An additional benefit of HELOCs is that you are only required to pay interest on the amount you actually use.
HELOCs are popular choices for shorter term projects which still have significant costs, such as a kitchen remodel. However, HELOCs can be used for just about anything – whether it’s the landscaping project you’ve been nagging your spouse about for years or filling in for some regular expenses as you pay down other debt.
Work with your banker to determine which option is best for your situation. When you do choose one, be sure to ask your tax advisor about any possible tax deductions that may come with the home equity lending option you choose.