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Ask Money

Home Equity Loans?

Chris Farrell Jun 5, 2008

Question: A) Love the show. B) In these uncertain economic times, am I better off getting a Home Equity Loan, or a Home Equity Line of Credit? Oh, and, what the sam-hell is the difference? Joel, Milwaukee, WI

Answer: I’m glad you love the show. Let’s do the definitions first. A home equity loan (also called a second mortgage) is a lump sum of money. You pay it back on a regular basis over time, just like a mortgage. A home equity line of credit allows you to write a check (or use a special credit card) whenever you need to borrow against the equity in your home. The interest rate is typically fixed with a home equity loans, and the rate fluctuates (depending on the market environment) with a home equity line of credit. In both cases the equity in your home acts as collateral.

In general, a fixed-rate home equity loan is tailor-made for major remodeling projects, such as a new kitchen or bathroom. The variable-rate home equity line of credit is better for smaller projects that are accomplished over a longer period of time.

Now, I’m in the camp that says the money borrowed against the equity in your home should go toward improving the value of your home and the joy you get from living in it. This isn’t money you tap for expensive vacations.

However, one additional advantage of a home equity line of credit is that it can be part of your emergency savings. In case of a financial emergency, say a major medical bill or a lost job, you can use the line of credit to help tide you over.

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