Home Equity Loan, Line Of Credit, Or Refinancing? Choosing The Right Loan

Whether your goal is to remodel or renovate your home, or simply to pay off bills, tapping into your home's equity can be a great choice. But of the various options available, the best choice often depends on your personal situation. Read on to learn the pros and cons of the different ways to use your home's equity.

Home Equity Loan

A home equity loan, or HEL, is a one-time loan which pays a lump sum based on your current home's equity. Traditionally, a lender will require you to have more than 20 percent equity in your home to take out a HEL -- the HEL may then be made in any amount you choose, as long as your home equity remains at at least 20 percent. HELs are usually offered at a fixed interest rate, and has a fixed term. Generally, you will make monthly payments toward your HEL until the end of the term (or sooner, if you choose to pay off early).

HELs are usually the best financial choice for those who are undergoing a one-time renovation project, or just need some short-term help to catch up on bills. Before taking out a HEL, be sure that you calculate and can afford the monthly payments.

Home Equity Lines of Credit

Home equity lines of credit, or HELOCs, are revolving lines of credit -- similar to credit cards -- that can tap into your home's equity. Most HELOCs have both a fixed term and a maximum credit line, as well as required minimum monthly payments. At the end of the HELOC term, any remaining balance is added to your existing mortgage or rolled into a second mortgage.

HELOCs are usually most useful if you have an ongoing renovation project which will require you to make payments over a period of time, or if you are expecting an ongoing expense (for example, medical bills) for a long period of time. 

Refinancing

Refinancing simply takes your current balance and re-amortizes it at today's interest rates. You can choose to refinance to any traditional mortgage product -- a 30-year loan, 15-year loan, 10-year loan, or adjustable-rate mortgage (ARM). If you have more than 20 percent equity in your home, you can choose a "cash out" refinance, where the equity in excess of 20 percent is paid to you in a lump sum.

Refinancing can be the best option if your interest rate is much higher than current market rates, or if you would like to reduce the term of your loan or reduce your monthly obligation. If you have a large amount of equity in your home and refinance to lower your interest rate without taking all this equity out, your monthly payment should be substantially reduced.