Is It Better to Get a Home Equity Loan or Line of Credit
Written by True Tamplin, BSc, CEPF®
Updated on January 11, 2021
It is better to get a home equity loan if you know exactly how much money you need, whereas a home equity line of credit, or HELOC, is better if you will have a period of ongoing costs with no definite amount, such as during a home renovation.
Difference Between Home Equity Loan and Home Equity Line of Credit
The differences between a home equity loan and a home equity line of credit, or HELOC, are the same as the differences between a loan and a credit card; a loan is a lump sum, and an LOC is a revolving credit line.
Both charge interest.
Is It Better to Get a Home Equity Loan or Line of Credit FAQs
Line of Credit (LOC) Definition
What Is a Line of Credit?
A Line of Credit, or LOC, is money lent to an individual or business which the borrower pays interest on.
Depending on the type of LOC, the client either receives a lump sum, or is allowed to “draw against”their line of credit to make purchases, until the credit limit is reached.
Typically lines of credit are given by banks, such as when an individual is issued a credit card.
What Is a Line of Credit and How Does it Work? Revolving vs Non-Revolving
Lines of credit will either remain open, or will close, once the loan has been repaid.
Revolving lines of credit are considered “revolving”because an individual’s credit is replenished when some or all of the outstanding debt has been paid off.
In contrast, a non-revolving line of credit is closed once the account is fully paid off, such as a student loan or mortgage.
Non-revolving credit usually has a lower interest rate.
How does a Line of Credit Work? Secured vs Unsecured
Loans may be unsecured loans, or secured by collateral.
A home equity loan is an example of a collateralized loan, whereby the home is the collateral and will be claimed by the creditor in the event of a default on the loan.
Credit card loans are almost always unsecured, which causes creditors to take on more risk and is why credit card interest rates are generally higher and the borrowing limits are generally lower than secured loans.