Which type of home equity loan should you choose?
This all depends on your situation. However, there are some scenarios where the choice is apparent. For instance, let’s say you need $15,000 to pay for your daughter’s wedding next month and $5,000 to fix your roof next week. In this scenario you know exactly how much money you need and that you have a short window in which the payments will be due. A straight home equity loan (term loan) for $20,000 makes the most sense, so long as you’re not planning on borrowing again in the near future.
But if you need money over a longer, less defined period of time – for example, at the beginning of each school year for the next four years to pay for your child’s schooling or for a remodeling project that will take three years to finish – a line of credit would better fit your needs. A line of credit would give you the flexibility of borrowing only the amount needed, at only at the times when you need it.
Another instance would be if you were to borrow a relatively small amount and could pay back the principal quickly, a line of credit could cost you less than a home equity loan.
Consumers with high levels of credit card debt will often borrow from their home equity to receive a lump sum and pay off their Visa, MasterCard and department store charges all at once. They will then pay back the bank over time at a lower interest rate than their credit cards were charging them. This is the most popular form of debt consolidation that people utilize when taking out home equity loans. In this case, fixed-rate home equity loans are used more often than lines of credit.