Using Home Equity

For all the many, many pitfalls of the past three years, existing homeowners may be experiencing one tiny glimmer of positivity: equity. With the surge in home value during the height of the Covid-19 pandemic, many homeowners are finding themselves with tons of equity in their homes. And– they want to use it. Here’s the low-down on the difference between a home equity loan and a home equity line of credit. 

Wait- They’re Different? 

They sure are! One might assume that a home equity loan and a home equity line of credit (HELOC) are one and the same but they actually originate in different ways. A home equity loan operates like any other loan: you determine the amount you’d like to “borrow,” and then make monthly payments on it. (Very similar to your mortgage.) 

A HELOC, however, feels more like a credit card would. You can borrow up to a certain amount and then either carry that “debt” with you, pay it off, or re-borrow as needed. 

There are definite pros and cons to each type of equity line. 

Advantages of a home equity loan:

• You know exactly how much you are borrowing.
• The interest rate is usually fixed, so the payments are predictable.
• There is no way to increase the line later, so you cannot overspend.
• All the interest is tax deductible.
• Interest rates are usually low.

Advantages of a home equity line of credit: 

• With a HELOC, you can get a line of credit and not tap it until you’re ready to use the funds.
• You can continue to borrow off the credit line as long as you’ve paid off what you owe, as with a credit card.

To read more about the different ways to use your equity, visit Realtor.com.