Home Equity Loan or Line of Credit: Which is Right for You?
One of the many rewards of owning a home is building equity in it—and being able to use that equity to pay for big-ticket items and expenses, like renovations or education. You can do this with either a home equity loan or home equity line of credit (HELOC). Both are popular ways of tapping your home equity for funds, but they work in different ways and are best for different situations. Here are the key features of each to help you decide which is right for you.
Equity is the difference between how much your home is worth and how much is left on your mortgage. So if the current market value of your house is $200,000 and you owe $80,000 on your mortgage, you have $120,000 in equity.
You don’t have to pay closing costs or private mortgage insurance (PMI) with either a home equity loan or HELOC, so you’ll save money right from the start.
Home equity loans and HELOCs use your home as collateral, which is why they usually have better interest rates than personal loans and credit cards. But if you stop making the required payments without discussing the situation with your lender, you risk foreclosure (losing your home).