Home Equity Loans & Home Equity Lines of Credit: Your Definitive Guide

The differences between home equity loans and home equity lines of credit

Are you confused about how to decide between a home equity loan and a home equity line of credit? Use today’s post as your guide to make the best financial decision. 

Everyone has needs, whether it’s making repairs or improvements to our homes, a new vehicle or an emergency expense. However, you may not always have the cash on hand to pay for these needs. The good news is if you’re a homeowner and have stayed up on your mortgage payments, you have a secret superpower that can help: the equity of your home.

Home equity loans and home equity lines of credit, also referred to as HELOCs, can be beneficial financial tools when used correctly. But how do you know if one of them fits you, let alone which one to pick?

Let’s take a look. 

Similarities Between Home Equity Loans and Lines of Credit

Per their name, home equity loans and home equity lines of credit are secured by your home and the equity built up in your home. Whenever you make a payment on your mortgage, you own a little bit more of the total value of your home. The amount of it you own is the equity, so if you’ve paid $125,000 on a $200,000 mortgage, your home has at least $125,000 of equity built up.

Both of these types of financing also have interest that may be tax deductible, but you should check with your tax advisor to gain a full understand of the deductibility of the taxes.

The Differences Between Home Equity Loans and HELOCs

There are a number of key differences in these two types of financing that make them suitable for certain people in specific situations:

  • Your cash needs- If you have an immediate need for a large lump sum of cash, a home equity loan is the better choice. If you have cash needs now, but know you will need cash in the future as well, a home equity line of credit makes more sense for you.
  • Delivery of funds- a home equity loan gives the entire sum to you at once, whereas the line of credit is drawn on over time.
  • Fund accessibility- a home equity line of credit has great flexibility when it comes to access for your funds, with most lenders allowing you to write checks, use a debit card tied to the account or transfer funds via online banking when you need them. On the flip side of the coin, the funds for a home equity loan are given one time in the form of a check or an electronic transfer.
  • Repayment options- repaying a home equity loan is simple because you have a fixed interest rate and payment for the life of the loan. Repaying a HELOC is also simple, as you there a number of ways you can repay what you use (interest-only, principal plus interest, etc.)

The Bottom Line

After looking at the differences between home equity loans and home equity lines of credit, here’s a simplified way to know which is best for you:

  • Home Equity Loan- you have a large cash need that is immediate and you know you can afford a fixed monthly payment.
  • Home Equity Line of Credit- you have cash flow needs throughout the year, need flexible access to your credit line and would like a variety of repayment options.

Once you have figured out the best choice for you, be sure to get in touch with Putnam Bank. We can help you get the funds you need while ensuring your repayment plan fits your needs and your budget. Come see us today to see how we can help!

Putnam Bank, member FDIC and Equal Housing Lender