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Using Your Home Equity: Loan vs Line of Credit

Home remodeling project

Home equity loan or line of credit (HELOC) — which one’s right for you?

Thinking about making some home improvements this fall — or planning ahead so you’re first in line with your contractors next spring? Then you’re probably on the lookout for affordable financing. One option that could be a good fit: tapping into the equity of your home. 

What is home equity financing?

Your home’s equity is the difference between what your home is worth and any debts you have against it (like a mortgage). If you made a big down payment or your home’s value has gone up since you bought it, you might have a fair amount of equity built up. Home equity lending gives you a way to tap into part of this money. It can be relatively easy to qualify for these loans — because your house will serve as collateral — the interest rates are often lower than for other personal loans.

Home equity financing comes in two options: 

1. Home equity loan. You’ll borrow a set amount of money at a fixed interest rate and for a set amount of time. In short, it’s very similar to any other type of lump sum loan.

Advantages: These loans are easy to budget for: You know the amount of your monthly payment and the length of your loan upfront. And a fixed-rate loan could save you money if rates go up over the life of your loan.

Disadvantages: Repayment terms are typically less flexible, which could make a difference if your financial condition changes. And if your project ends up costing more than you borrowed, you would need to reapply for a new loan.

A good fit for home improvements with a fixed price tag, like window replacements or a roof repair.

2. Home equity line of credit, commonly known a HELOC. This gives you access to a pool of money, but you won’t be charged interest or have to make payments until you actually borrow against it.

Advantages: Flexibility is the biggest benefit. You only borrow the amount you need, when you need it, and you won’t make payments until you start borrowing. Payment terms tend to be more flexible: you might be able to make interest-only payments and you might have an adjustable interest rate on the money you borrow. At Summit, you also have an option to lock your balance into a low, fixed-rate for more predictable payments on a set timeline.

Disadvantages: It can be harder to build this into your budget as the amount you’ve borrowed could change from month to month. You could also face higher interest payments with adjustable rate loans.

A good fit for a project where the total cost is harder to nail down, like a bathroom remodel, or if you’d like to tackle more than one project. Having access to a line of credit means you won’t have to apply for a new loan each time you need money (as long as it doesn’t exceed the amount of your line, of course!).

And no matter which Summit home equity product you choose, you’ll get low rates and no annual fees or prepayment penalties.

Want to investigate tapping into the value of your home? Get started with Summit lending expert today!