What do medical expenses, credit cards, and home improvement have in common? All could be a reason for applying for a home equity loan or line of credit. Home equity is the difference between the value of a home and the debt owed on the property. A home equity loan or line of credit provide an opportunity to use some or most of the equity that has accumulated. Though a home equity product can help when life throws a curveball, it is important to understand the two most common home equity options.
Home equity loans
A home equity loan allows a homeowner to borrow home equity using property as security for the loan. This is a great option for someone who knows the specific amount of money they need. Though the expenses of a home equity loan are less than a first mortgage, closing costs such a professional appraisal, title work, and various fees usually need to be paid. A major advantage of a home equity loan is the fixed interest rate.
Home equity line of credit (HELOC)
A HELOC is a home equity product that provides a line of credit which can be used all at once or over a period of time. Like a home equity loan, a HELOC is secured by the home. A HELOC is more flexible, but the interest rate is variable. Typically, this is a great option if the amount needed is uncertain, since there is no requirement to use the full line of credit.
When to use home equity
Home equity products can be used in a variety of ways. Below is a guide to help determine which product is best in which situations:
| Reason | Home Equity Loan | HELOC |
| Debt consolidation | X | X |
| Home repair or improvement with a known amount | X | X |
| Home repair or improvement with an unknown amount | X | |
| Gap funding for educational expenses | X | X |
| I need to borrow at a fixed interest rate | X |