Line of Credit vs. Lump Sum

Depending on your credit and your lender, you may have a choice between a line of credit and a lump sum. A lump sum of course, means you get the entire loan all at once and up front. You may have a 15, 20 or even 30 year loan depending upon the terms of the home equity loan. Like any other loan, you’ll make payments every month.

A line of credit however is altogether different. The interest rates are similar but by taking out a line of credit, you won’t have the amount of the loan to use all at once. You’ll receive a checkbook or a credit card with which you can make “withdrawals” upon this line of credit up to a predetermined amount. You may still have as long to pay it back as with a lump sum if you choose.

Generally, you will have a small payment every month that may just go towards the interest and then you’ll have what is referred to as a “balloon” payment where the bulk of the loan is due at the end of the loan term which could be 15 or 20 years down the road. This can sound very attractive however, that huge balloon payment will come due eventually and if you can’t pay it you will lose your home.

A home equity line of credit, or HELOC may be the preferred method of home equity loan in several different situations. Suppose you’re taking out the HELOC because you need expensive medical treatments but you only want to borrow as much as you absolutely have to. Or you’re remodeling your home but again you only want to borrow as much as you have to.

Either of these situations would be appropriate situations to arrange a HELOC. By not borrowing the maximum amount of equity you most likely will be able to pay it back early yet the line of credit will be available if you need it. A HELOC is a useful option that allows you to tap into your home equity without incurring substantial debt.