Which Is Better, a Home Equity Loan or Line of Credit?

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Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.

Today’s question is about borrowing by using your house as collateral; specifically, the difference between home equity loans and home equity lines of credit.

Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.

You also can learn how to send in a question of your own below.

For more information, check out “Here’s How to Get a Large Loan Fast” and “4 Ways Home Equity Loans Can Sink Your Finances.” You can also go to the search at the top of this page, put in the words “home equity loan” and find plenty of information on just about everything relating to this topic.

And if you’d like to compare current offers on mortgages and home equity loans, along with lots of other financial products, be sure and visit our Solutions Center.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.

Today’s question comes from Alison:

“We’re thinking about taking out a home equity loan to pay off some high-interest debt and fix up some things around the house. Should we get a regular home equity loan, or a home equity line of credit? What’s the difference?”

OK, Alison, let’s discuss.

Borrowing against your home

Both home equity loans and lines of credit allow you to borrow at relatively low, potentially deductible rates by using your home as collateral. There are, however, important differences between the two.

A home equity loan is a second mortgage. As with your first mortgage, you’ll borrow a lump sum, and have fixed monthly payments, a fixed interest rate and an ending date when you’ll make your last payment.

A home equity line of credit is like a credit card. You’ll be approved for a maximum credit line, which you’ll tap whenever you choose. The payments will vary based on the amount you borrow, and like a credit card, the interest rate can fluctuate over time. Also like a credit card, you can run up a balance, pay it off and start over. There is no ending date.

Which of these loans is best depends on the reasons you’re borrowing. If you need a lump sum — say, for a room addition, or to pay off a specific debt — the loan is best. If you’re going to need varying amounts at varying times — say, for a kid heading off to college, or for your small business — a line of credit may better fit the bill.

As with other loans, your ability to borrow, along with the terms you’re offered, will depend on your credit history and score.

Potential problems

Both home equity loans and lines of credit can help you find financing at favorable rates, but they also carry a significant risk. Because they’re backed by your home, failing to meet your obligations could literally mean losing the roof over your head. So, approach these loans with extra care.

If you’re tapping your home equity to meet a one-time expense, and can easily afford the payments, fine. But if you’re borrowing because you’re living beyond your means, you’re better off borrowing via a method that doesn’t put your home at risk.

There’s a common expression used in the credit counseling industry that describes these loans: “Buy a blouse, lose a house.” Keep it in mind as you consider these loans.

Well, Alison, there go: Now you know the difference between home equity loans and lines of credit. And you know you need to be careful. What’s left? Where to find these loans. We’ve got a comparison tool at Money Talks News that will show you rates from lots of lenders nationwide. Just go to Money Talks News and click on our Solutions Center.

OK, that’s that. Now, what about you? Got a question of your own to ask? Then do what Alison did: Simply hit “reply” to any Money Talks email newsletter and fire away. I can’t answer every question, but I do my best.

And if you’re not getting our newsletter? Fix that right now by going to Money Talks News and subscribing. It’s free, takes five seconds and will absolutely, positively make you richer.

I’m Stacy Johnson. See you here next time!

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About me

I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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