Two ways to use your home’s equity

You can leverage your home’s value to gain access to needed funds. Whether you’d like to build an addition, remodel your kitchen or pay for your daughter’s undergraduate education, home equity loans and lines of credit offer attractive ways to borrow money.

Although often lumped together under the umbrella of home equity, these loans and lines of credit have important differences to note when you’re considering applying for either.

Home equity loan
Like your original mortgage loan, a home equity loan gives you a one sum that you pay off over time. The term is usually shorter than your original loan—five to 15 years versus the typical 30 years—but the interest rate is fixed, resulting in the same steady, monthly payments that you’re already used to.

Once you get the money, that’s it. You can’t decide six months into the loan that you’d like a little more for better kitchen countertops or because your son needs to spend a semester in Europe. And your home is the collateral, meaning the lender can foreclose if you don’t repay the loan as agreed.

Home equity line of credit
A home equity line of credit is like a credit card. You borrow what you need, when you need it, up to a certain amount during the time period set by the lender. They offer you more flexibility than a fixed-rate home equity loan, and home equity lines of credit also require you to use your home as collateral.

Usually, you write a check or use a credit card connected to the account. Because the amount you owe at any time may vary, you make payments only on the amount you actually borrow—not the full amount available. Because credit lines have a variable interest rate, payments will vary depending on the interest rate and how much credit you have used. When the line of credit expires, you must pay off the balance.

Which type should you choose?
Your choice depends on what you need. If you know you need $10,000 to replace your roof, a loan and its fixed-rate certainty might be the best choice. However, if you start a kitchen remodel but think you’d like to also gut a bathroom or two, a line of credit and its flexibility could be a good fit.

Talk to your lender to determine what fits best for your scenario.