Pros: Home Equity Loan
• Fixed Interest rate - Interest rates are locked for the life of most home equity loans. This prevents a home owner from incurring unexpected rises in their mortgages monthly payments.
• Longer loan term than home equity lines of credit - A borrower will enjoy lower monthly payments with this type of 2nd mortgage loan since the payment amortization schedule is over a longer time period, up to 30 years.
• Less chance of increasing outstanding debt - Since a HEL is a one time, single amount of money borrowed, a homeowner should be less tempted to apply for additional loan funding. A HELO is similar to a credit card in that the loan's owner can continuously draw down money from the loan and potentially continue to slide further into debt since it is easy to borrow additional money.
Cons: Home Equity Loan
• Fixed Interest rate - If interest rates fall after obtaining a fixed rate home equity loan, a borrower will end up with higher loan payments versus a home equity line of credit loan with a variable rate that adjusts downward.
• Higher interest payments - Since a HEL generally has a longer term than a HELOC, more interest expense payments will be made over the life of the loan.
• Can only receive loan money one time - If additional money is needed after receiving a home equity loan, a borrower will have to apply for a new loan or consider refinancing their home loan.
Pros: Home Equity Line of Credit
• Ability to increase or decrease the amount of money borrowed - During the term of this type of loan a borrower can receive more financing from their lending company or lower the amount borrowed depending on what is the amount of money needed.
• Lower monthly payments - Interest only payments can be made which would be substantially lower than those of a home equity loan which would include principle plus interest.
• Lower interest rate - HELO loans usually have the lowest rate compared to home equity loans and are variable.
Cons: Home Equity Line of Credit
• Variable interest rate can increase - A borrower may incur an unexpected increase in their loan payments due to an increase in the loan's interest rate which is generally indexed to the Prime Rate and adjusted when it changes.
• Shorter loan term - A home equity line of credit generally has a shorter loan length than a home equity loan which requires that the money borrowed be paid back quicker.
Your Final Decision: Home Equity Loan vs. Home Equity Line of Credit
|A Home Equity Loan May Be For You If... ||A Home Equity Line of Credit May Be For You If... |
|1. You prefer fixed monthly payments that won't change over the life of your loan |
Home equity loans typically have a fixed interest rate that will give you the comfort of always knowing what should be budgeted for a monthly loan payment.
|1. The possibility of an increase in your monthly loan payment is not as important as lower interest rates |
An equity loan line of credit generally will have a lower interest rate that is variable and indexed to the Prime Rate. If a future increase in interest rates isn't a concern, this type of loan could save you money if you believe current interest rates will remain lower than fixed interest rates.
|2. A longer loan term is needed |
Home equity loans can be obtained for 15 or 30 years while HELOs terms are generally up to 10 years.
|2. You are uncertain as to how much money will need to be borrowed and when |
Flexibility is one of the strengths of a home equity line of credit. Since it acts as a revolving line of credit, as your need to borrow more increases, the credit line can be used. The borrower decides when to use the loan and how fast to pay it off.