Home Equity Loan or Line of Credit - which one is right for you?

Published: April 15, 2022

Your home is one of the wisest investments you may ever make. As you accumulate equity in your home, you can borrow against that value to make home improvements, consolidate bills, pay for your child’s college tuition and much more. Equity is the difference between what is owed on a mortgage loan and the home’s current value.  

Home equity lines of credit (HELOCs) and home equity loans (HELOANs) are two ways to use the equity you have in your home, and the interest rate on these type of loans are typically lower than other types of loans because you are using your home as collateral on the loan. HELOCS and HELOANS are different in several ways, however, so understanding how each one works can help you decide which option is best suited for you.

Home Equity Lines of Credit

With a home equity line of credit, you get approved for a certain credit limit, and you can withdraw funds within that limit whenever you need them and continue to use the funds as you repay them. You decide when to use the funds, and you pay interest only on the money you actually use. Most HELOCs feature variable interest rates, which means they can go up or down according to market conditions because they are tied to a certain benchmark such as the U.S. Prime Rate as published in the Wall Street Journal.

During the borrowing period, you’ll need to make at least minimum monthly payments on the amount you owe. At Citizens National Bank, we allow interest-only payments during the borrowing period. HELOCs at other financial institutions may require minimum payments of principal and interest. Once the borrowing period ends, which is usually 10 to 20 years, you’ll repay the remaining balance on your HELOC or possibly convert the balance to a fixed rate loan.  

Home Equity Loans

While a home equity line of credit resembles a credit card, a home equity loan is a fixed rate loan. You borrow a specific amount, and then make regular payments during a fixed repayment period. The payment amount is the same every month and includes interest charges plus a portion of the loan principal.  With a home equity loan, you get a lump sum of cash at the loan closing. You will also know how much your monthly payments will be and how long it will take to pay off the loan.

Home equity loans may be a better choice for you if you have a tendency to overspend and you think you might use your home equity line of credit excessively.  Also, in periods of a rising rate environment, a home equity loan gives you the comfort of knowing you have locked in an interest rate that won’t fluctuate.

Our CNB Personal Bankers will be glad to visit with you in person and help you determine whether a home equity loan or line of credit is best suited for you. Then, you’ll be on your way to achieving your financial goals and taking advantage of the equity you have built in your home.