Home equity loan vs. a home equity line of credit: what’s the difference?

If you see a major expense in your near future but don’t quite have the cash on hand to cover it, tapping into the equity of your house – the value of your home minus the amount of mortgage you still owe – might be a good option. You can do this in one of two ways: a home equity loan or a home equity line of credit.

Each of these options, secured by your house, has the benefit of offering lower interest rates and higher borrowing limits than personal loans. The interest you pay on them may also be tax deductible, but always consult a tax advisor to find out for sure. In other words, a home equity loan or line of credit could save you money when compared to other options.

What is a home equity loan?

Home equity loans are ideal for covering a single large expense, like a kitchen remodel, wedding, one-time medical treatment or debt consolidation.

Here’s a quick overview of the benefits of home equity loans:

  • The loan amount is provided to you all at once.
  • Home equity loans have a fixed rate and fixed monthly payments, so it’s easier for you to budget and gives you peace of mind.
  • The term and repayment options are flexible, so you can choose the ones that best fit your needs
  • Commerce Bank’s home equity loans have no closing costs, origination fees or early payoff fees.

What is a home equity line of credit?

A home equity line of credit (or HELOC) offers the flexibility and convenience of ongoing credit. HELOCs are well suited for longer-term home improvement projects, ongoing expenses like college tuition or paying for braces, or if you aren’t certain how much cash you’ll need. They’re also a good option if you want an emergency fund that can be accessed quickly and easily.

Here are a few reasons HELOCs might be a good solution for you:

  • You can access the funds as soon as you close and continue to use them for the life of the line of credit, up to the approved limit.
  • Your payments and interest are based only on the funds you actually use, and they may be as low as interest only. Any remaining balance is due in a “balloon” payment at the end of the loan term.
  • They offer a variable interest rate that follows the market and could potentially have a lower rate than other lending options.
  • HELOCs secured through Commerce Bank allow you to access your funds in multiple ways. You can write a check, transfer funds online, call Commerce’s 24-hour information line or simply visit a branch.
  • Commerce Bank HELOCs have no closing costs, origination fees or early payoff fees.

Which one is right for you?

The choice between a home equity loan and a HELOC may depend on how you intend to use the funds or simply your personal preference.

A home equity loan may be the smart choice if:

  • You prefer knowing exactly what your payments will be each month.
  • You know how much money you’ll need.
  • You want to accommodate a single large expense.

A HELOC may be better for you if:

  • You want to cover expenses incurred over a longer period of time.
  • You aren’t certain how much money you’ll need or when you’ll need it.
  • You’re comfortable with variable interest rates.

Of course, you also have the option of not picking between the two at all. If you have multiple needs at the same time and want to account for everything, it’s possible to secure one of each.

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