Individuals sometimes decide to take out a home equity loan or a home equity line of credit to pay for a child’s college tuition, a home improvement, or some other major expense. Some of the differences between a home equity loan and line of credit are that the loan is a lump sum disbursement, but the line of credit is money that can be drawn on as needed; a home equity loan has closing costs, but a line of credit generally has none; and a line of credit has a variable interest rate, but a home equity loan generally has a fixed rate. A person considering either should carefully consider the differences before choosing the option that is best for him or her.
A home equity loan gives the homeowner one lump sum of money, while a line of credit allows the owner to draw on a set amount of money whenever he or she needs it. One option is not necessarily better than the other, and it often simply depends on which way the homeowner would like to receive his or her cash. If he or she has a big expense at one time, then the home equity loan might be a better choice. Access to cash for several expenses or a series of expenses over a period of time might make a line of credit the better choice, because the homeowner could avoid the closing costs that would be charged if he or she took out several home equity loans.
Home equity loans incur closing costs, but most lines of credit do not. This makes a line of credit more tempting to many homeowners, but some lenders do charge a fee for each disbursal from a line of credit. If a borrower ends up needing more than one loan, however, he or she will be charged closing costs each time.
Interest rates are a key factor in making the choice a home equity loan and line of credit for many people. A line of credit’s interest rate typically is variable, meaning that it can go up or down. Home equity loans usually have a fixed rate, so the homeowner knows exactly what he or she will be paying. Because every homeowner's situation is different, he or she should weighing all options before deciding which choice to make.