If you are shopping for a home equity product, it is likely that you have encountered two common options: the home equity loan and home equity line of credit. Understanding the difference between these two products helps you make an informed decision that suits your financial needs.

The Home Equity Loan

When you take out a home equity loan, you borrow a specified amount of money for a certain period of time. The interest rate stays the same throughout the length of the loan. Once you take out a home equity loan, you cannot take out more equity from your home unless you take out another loan.

The Home Equity Line of Credit

A home equity line of credit is a revolving loan product. Instead of borrowing the money all at once, you draw from the line of credit as needed. The interest rate is usually variable, and the payment is a percentage of the amount borrowed. Some lines may offer a fixed interest rate option.

The Similarities

Both the home equity loan and home equity line of credit require that you have equity in your home. The amount of equity in your home is the difference between the amount you owe on the home and the amount that it is worth. If you owe $100,000 on a home that is worth $150,000, you have $50,000 worth of equity.

Your credit history is taken into account for both loans.

The interest on both loan products may be tax deductible. 

If you default on either type of loan, the bank can seize your home.

The Differences

A home equity loan usually has closing costs associated with the loan. Generally, the home equity line of credit does not have closing costs, but it may require an annual fee to keep the line open.

With a home equity loan, you receive the money in a single lump sum. When using a home equity line of credit, you control how much you receive and when. 

Home equity loans usually require that you borrow a minimum amount, while a home equity line of credit does not.

Which Product Is Best for Me?

If you know that you need to pay for a large expense, the home equity loan is a smart option.

A home equity line of credit is a great alternative for a back up emergency fund. It is also better suited for smaller loan amounts.

When you need cash, tapping the equity in your home is a wonderful way to obtain the funds that you need. Take a few moments to learn about two popular loan options so you can pick the product that works best with your financial situation.