Home Equity as Low Interest Rate Credit

It’s an often-asked question: Should I pay off my credit cards with a home equity loan or home equity line of credit (HELOC)? Also, many people may be wondering if it’s better to pay for a home improvement, like a kitchen renovation, using a credit card, a store-sponsored credit card, or the equity in their home.

It would be great if the answers to these questions were simple, but they aren’t. Interest rates change daily, introductory rates are offered, and payment terms and conditions can have a big impact on what makes the most sense.

Under normal conditions, rates for credit cards, and especially store-sponsored credit cards, tend to be higher than rates associated with home equity loans and lines of credit. Under these circumstances, you may want to review the benefits of home equity to consolidate debt or for use for home improvement projects.

A Quick Overview

A home equity loan, sometimes called a second mortgage, is a lump sum loan based on the equity you’ve built up in your home. It can be particularly helpful if you have imperfect credit, and offers a fixed interest rate and a variety of amoritization periods so that you can pay back your debt under favorable terms.

A home equity line of credit (HELOC) is different from a home equity loan in that you withdraw money from your account as you need it, rather than taking out a loan in a lump sum. In addition, a HELOC is revolving debt, like a credit card. You can borrow up to a specific credit limit and interest is charged on the amount borrowed. You can pay your debt down and then borrow again when you need to during the draw term, which is usually between five and 10 years. A home appraisal may be required to obtain a HELOC.