Using Home Equity: Term Loans vs. Line of Credit

By: Horizon Bank Last Updated: August 28, 2011

home-equityA home equity loan or line of credit can serve as an alternative to a personal loan, allowing you to pay for major expenses such as medical bills or college tuition. Unlike traditional loans, a home equity loan uses your home as collateral for borrowing. Here are a few of the characteristics of home equity loans and lines of credit:

  • Great source of cash for homeowners
  • Often have shorter terms than a mortgage
  • Most have lower interest rates than personal loans and credit cards
  • Loan amount is based upon home appraisal and credit limit Terms range from five to 15 years
  • Homeowners can pay back the loan through monthly payments

Home equity borrowing is available in two forms: Term loans (fixed-rate loans) and home equity lines of credit (HELOC). The distinction between the two is that a term loan has a fixed interest rate and consistent monthly payments, whereas the HELOC has a variable rate.

How do you know which is best for your situation? Here are a few scenarios in which you should consider a term loan:

1. You need a loan to help fund a large purchase such as an extensive home improvement project.

2. Your financial needs would be best delivered in a lump sum.

3. Interest rates are low, and you want to lock in a fixed interest rate.

4. You are looking for an extended term of several years to give you time to pay off the balance.

A home equity line of credit, on the other hand, is your best choice in alternate circumstances. Here are a few scenarios in which an HELOC should be considered:

1. You only need to withdraw money on an as-needed basis.

2. You are interested in borrowing to cover short-term costs, such as tuition payments.

3. You prefer a flexible repayment based on the amount you borrow each month instead of fixed payments.

Borrowing against your home’s equity allows homeowners to access cash without racking up huge a balance on their credit cards. Whether you need a lump sum payment or flexible repayment, a home equity loan or HELOC is an inexpensive and easy way to borrow.