EchoBay Expert: Will I find the best home equity loan rates for a revolving home equity line of credit or a 15 year home equity loan?
Loyal Reader: In the beginning of your loan term, the lower rate will be offered on the home equity line of credit. This is because a home equity line of credit features a variable rate. The rate will start off low and will generally increase over time. This rate is usually stated as WSJP (Wall Street Journal Prime) plus a certain number of percentage points.
As WSJP changes, so will your loan rate. While the interest rate can be very attractive in the beginning, if rates begin to rise you could see a significant increase in the amount of interest you will end up paying on the money you borrow from your line. Home equity loan rates are fixed along with the payment amount. This equates to a higher interest rate, although home equity loan rates are generally very low and comparable to mortgage rates.
Of course with a home equity loan, you will get a lump sum upfront whereas the line of credit allows you the flexibility to draw the money when you need it. Deciding between a home equity line of credit and a home equity loan depends largely on how you plan to use the money. If it is a one-time purchase, a home equity loan can be the best way to go even though home equity loan rates are higher.
This of course assumes that you will be taking years to pay off the loan amount. If you want the flexibility to use the money as needed over the next 10-15 years, a home equity line can be your best choice.