By Sabrina Karl
If your home’s value sits well above your mortgage balance, tapping into that equity for home improvements or consolidating debt can be a smart financial move. Both home equity loans and lines of credit allow you to do that, so which should you choose?
Both access the value in your home that belongs to you, but that you otherwise wouldn’t reap until selling the property. Both also offer lower interest rates than credit cards and personal loans since they’re backed by your home’s collateral, with the added bonus of the interest being tax-deductible.
The difference lies in how you’ll access the money. A home equity loan is like most other loans you’d request from a bank, where you apply for an amount and, if approved, the bank extends a lump sum at a fixed interest rate.
Home equity lines of credit, or HELOCs, work more like a credit card. The bank sets a limit based on your equity and lets you draw from the HELOC as needed, usually at an adjustable rate. Banks generally offer HELOC access via checks and bank transfers, with some also providing a debit card.
How you’ll use the funds will determine the better fit for you. Consolidating higher-interest debt? Then a home equity loan will work well, giving you a lump sum to pay off those balances and convert them to a single, more affordable payment going forward.
But if you’re tapping funds for home improvement, paying contractors throughout the project, a HELOC lets you borrow the money in flexible amounts at different times. A HELOC can also be useful as an emergency cushion, sitting untapped unless you need it.
With their low interest rates and tax advantages, home equity loans and HELOCs are among the most valuable financial tools available to homeowners with built-up equity.