Home Equity: Term Loans vs. Line of Credit


A home equity loan or line of credit can serve as an alternative to a personal loan, allowing you to pay for major expenses such as medical bills or college tuition. Unlike traditional loans, a home equity loan uses your home as collateral for borrowing. Here are a few of the characteristics of home equity loans and lines of credit:

  • Great source of cash for homeowners
  • Often have shorter terms than a mortgage
  • Most have lower interest rates than personal loans and credit cards
  • Loan amount is based upon home appraisal and credit limit

Terms range from five to 15 years

Homeowners can pay back the loan through monthly payments

Home equity borrowing is available in two forms: Term loans (fixed-rate loans) and home equity lines of credit (HELOC). The distinction between the two is that a term loan has a fixed interest rate and consistent monthly payments, whereas the HELOC has a variable rate.

How do you know which is best for your situation? Here are a few scenarios in which you should consider a term loan:

  1. You need a loan to help fund a large purchase such as an extensive home improvement project.
  2. Your financial needs would be best delivered in a lump sum.
  3. Interest rates are low, and you want to lock in a fixed interest rate.
  4. You are looking for an extended term of several years to give you time to pay off the balance.

A home equity line of credit, on the other hand, is your best choice in alternate circumstances. Here are a few scenarios in which an HELOC should be considered:

  1. You only need to withdraw money on an as-needed basis.
  2. You are interested in borrowing to cover short-term costs, such as tuition payments.
  3. You prefer a flexible repayment based on the amount you borrow each month instead of fixed payments.

Borrowing against your home’s equity allows homeowners to access cash without racking up huge a balance on their credit cards. Whether you need a lump sum payment or flexible repayment, a home equity loan or HELOC is an inexpensive and easy way to borrow.