Home Equity Loan vs. Line of Credit

With the downturn in home values nationwide, many people are left wondering about the possible benefits of a home equity loan, contrasted with what a line of credit might offer. Both options have built-in positives and negatives, and it is up to each homeowner to decide the right option. This article should clear up the differences and indicate reasons for getting the different types of credit.

Home equity loans as a way to a better home for resale

Home equity loans are great to use in a few different ways. One of these is home improvement. Say you have lived in a home long enough to the point in which things have gotten worn down, out style or out of building code. A home equity loan offers an easy way to raise funds to make these improvements without getting anything in return. If you live in a home for 10 years out of a 30 year mortgage and you want to prepare the home for sale, but do not have the extra cash lying around to hire a contractor, replace the carpet, other flooring, countertops and so on. Through the 10 years paying on your mortgage, you have probably paid tens of thousands of dollars down on your principal. Even during these tough economic times in which home values have plummeted, this can give you enough leeway to increase the value of the home and give you a wide enough return on investment. A $10,000 remodel of a kitchen and bathroom might up the value of your home by $20,000 or more if done correctly. Using a home equity loan to increase curb appeal is especially a good idea, as the outside of a home can encourage a sale as much as the interior, and create a good first impression for potential buyers. Some people at the height of housing market values borrowed against their home's value and ended up upside-down when the market bottomed out because they did not increase the value of the home with their loan.

Line of credit is good for short-term improvement needs or emergencies

When your roof leaks, the toddler spills red juice all over the carpet or the walls get drawn on from one end of the home to the other, a home equity line of credit might fill the void better than a term loan. A line of credit uses revolving credit that, as you pay the principal down, more is made available to use. Say you have a $10,000 home equity line of credit, and you need to repair your roof at $2,000. After you pay the loan back, you have the $10,000 to use again. If you like to do a lot of little projects over time, a line of credit is definitely better than a loan.

Find out whether a home equity loan or line of credit would work best for you. Home equity loans are great for big projects and one-time use, whereas lines of credit are better suited for constant updates and short term needs.