What’s the Difference Between a Home Equity Loan and Home Equity Line-of-Credit?

As house prices continue to climb, many potential home sellers are finding it cheaper to renovate rather than relocate. They can tap into the increasing value of equity in their home to finance the renovation. The home equity available is the current value of the home less the liens against it such as a mortgage.

So the question arises – should I get a home equity loan or line–of–credit?

Home equity loan

A home equity loan or term loan is a one-time lump sum payment that is paid off over a set amount of time, with a fixed interest rate and monthly payment. It is sometimes called a second mortgage. Your home is used as collateral.

Home equity line-of-credit

A home equity line of credit works more like a credit card. You borrow a certain amount over a certain period. During the specified time period you can withdraw the money as you need it. As you pay off the outstanding amount, your credit revolves and you can use it again. The rate of interest is variable. At the end of the term, you are expected to pay off the outstanding amount in full.

So what is better? There is no clear answer.

If you have a large one-time expense or want to consolidate a specific amount of debt, a home equity loan is your best bet. That way, you can pay for the expense and not have the temptation of available credit remaining.

If you expect recurring expenses, such as payments made to contractors during home improvements a line of credit allows you to “pay as you go.” You are only charged interest on amounts drawn against your credit line.

The appeal of both of these loans is their interest rate, which is almost always lower than those of credit cards or unsecured bank loans. That’s because your home serves as collateral for either a home equity loan or line of credit.

If you are looking to sell your home in this seller’s market, you need a real estate professional that can get you the best possible price. We have a large inventory of prospective buyers both local and overseas. Contact us or call us on 604 913 1000 and let us get you the best price for your home.

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