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

Couple on Porch
Photo by Monkey Business Images / Shutterstock.com

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!

Got a question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter, just as you would with any email in your inbox. If you’re not subscribed, fix that right now by clicking here. It’s free, only takes a few seconds, and will get you valuable information every day!

The questions I’m likeliest to answer are those that come from our members. You can learn how to become one here. Also, questions should be of interest to other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

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.

How to find cheaper car insurance in minutes

Getting a better deal on car insurance doesn't have to be hard. You can have The Zebra, an insurance comparison site compare quotes in just a few minutes and find you the best rates. Consumers save an average of $368 per year, according to the site, so if you're ready to secure your new rate, get started now.

Read Next
8 Amazon Picks Under $30 for Coffee Lovers
8 Amazon Picks Under $30 for Coffee Lovers

We’ve brewed up a list of amazing Amazon products that are sure to perk you up.

How to Save Up to 70% on 7 Everyday Purchases
How to Save Up to 70% on 7 Everyday Purchases

Stop getting sucked into paying a premium when good alternatives are available at huge savings.

11 Expenses to Cut Now If You Want to Retire Early
11 Expenses to Cut Now If You Want to Retire Early

Like the idea of financial independence? Part of the FIRE equation is cutting costs.

5 Reasons You Should Claim Social Security ASAP
5 Reasons You Should Claim Social Security ASAP

Experts often recommend postponing claiming your Social Security retirement benefits. But there are situations in which you should start taking the money sooner.

How to Fix 6 Common Retirement Mistakes
How to Fix 6 Common Retirement Mistakes

Here’s how to strengthen your nest egg before or even during your golden years so these missteps don’t ruin your retirement.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
Social Security Checks Likely to Grow This Much in 2021
Social Security Checks Likely to Grow This Much in 2021

The federal government recently released a key statistic that gives clear insight into what next year’s COLA will be.

This Gas Station Scam Is Victimizing More Drivers
This Gas Station Scam Is Victimizing More Drivers

For the second straight year, a growing number of Americans believe they’ve fallen prey to this scam.

21 Things You Should Always Buy at a Dollar Store
21 Things You Should Always Buy at a Dollar Store

Dollar stores have great bargains on both everyday and occasional purchases.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

7 Unusual Ways to Declutter Your Home
7 Unusual Ways to Declutter Your Home

Tired of possessions weighing you down? Here are seven ways to declutter painlessly and effectively.

This Is the Most Popular Age for Claiming Social Security
This Is the Most Popular Age for Claiming Social Security

Both men and women are most likely to start receiving Social Security benefits at this age.

6 Things You Should Never Buy at Trader Joe’s
6 Things You Should Never Buy at Trader Joe’s

We love Trader Joe’s for plenty of reasons. But think twice about this handful of products.

Don’t Toss These 7 Household Items — Sell Them
Don’t Toss These 7 Household Items — Sell Them

Here’s how to earn cash as you give new life to these unwanted items.

6 Legal Documents Retirees Need — but Don’t Have
6 Legal Documents Retirees Need — but Don’t Have

Few retirees have these documents that are crucial to their golden years — especially during a pandemic.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

5 Awesome Places You Can Retire Overseas on $2,000 a Month or Less
5 Awesome Places You Can Retire Overseas on $2,000 a Month or Less

In this week’s podcast: tips on retiring overseas — from someone who’s been helping American expats for decades.

Eat This Food If You Want to Avoid Alzheimer’s Disease
Eat This Food If You Want to Avoid Alzheimer’s Disease

One type of food associated with the Mediterranean diet offers especially large benefits.

11 Expenses That Quietly Drain Your Wallet
11 Expenses That Quietly Drain Your Wallet

It’s scandalously easy to overspend in these areas of your life.

Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?
Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?

You could save more than $30,000 by setting aside these costly expenses for just one year.

10 Deep Discounts Available on Amazon This Friday
10 Deep Discounts Available on Amazon This Friday

These items are all steeply discounted — but the deals won’t last long.

9 Dumb Ways You Are Ruining Your Home Value
9 Dumb Ways You Are Ruining Your Home Value

Homeowners, beware these mistakes that can drive away potential buyers.

18 Amazon Purchases That We Are Loving Right Now
18 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

7 Tips for Building an Emergency Stockpile
7 Tips for Building an Emergency Stockpile

A pandemic or natural disaster could leave you reliant on your existing food supply. Is your pantry prepared?

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.