Personal Insights
Home equity loans and lines of credit: which is best for you?

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Your home is where your family makes memories. But your home’s equity can also help you prepare for the future.

As your family grows, one day you may consider renovating your home, wonder how you’re going to pay for your children’s education, or decide whether or not it’s a good idea to buy a vacation home. In any scenario, home equity can help provide the financial support you’ll need to achieve these goals.

Home equity is determined by the value of your home, which is then weighed against the amount you owe on your mortgage. The less you owe, the more equity you have in your home. If you’ve built up enough equity, you may be eligible for a home equity loan or a home equity line of credit (HELOC), both of which can be used to fund home and family needs.

Here’s how it works: Let’s say your home is valued at $200,000 and you owe $120,000 on your mortgage. If your lender sets the maximum loan-to-value ratio at 80 percent, you can borrow up to 80 percent of the value of your home ($160,000), minus what you owe on your mortgage ($120,000). That would result in $40,000 of available home equity.

Home Equity Loan Versus Line of Credit

Most home equity loans are structured such that you receive a lump sum of money and pay it back in fixed monthly installments over a fixed period of time, typically 10 to 15 years. The most common home equity loan has a fixed interest rate that is locked in when you secure the loan.

Unlike a home equity loan, a HELOC functions much like a credit card with a minimum payment each month — or more, if you want to pay down the principal on the debt — with interest expense for the amount you've borrowed, not on the entire amount of the credit line. Use the home equity payment calculator to estimate your monthly payment amount.

When deciding whether to take out a home equity loan or a HELOC, consider your goals, the payment schedule, your spending habits, and your risk tolerance. If you have a one-time goal in mind such as a specific home improvement project, a home equity loan may be best. To finance longer-term goals or safeguard against unexpected emergencies, you might instead consider a HELOC that provides flexible terms for repayment and lets you borrow only the amount you need when you need it.

Of course, both types of loans carry some risk. Be sure to carefully assess your monthly budget before committing to such an additional expense, as late or missed payments can put your home at risk of foreclosure.

For more information, talk to a financial advisor about using home equity to meet your family’s next financial goal.