Either – depending on your situation. If you need the entire amount of loan in one lump sum you are better off with a home equity loan, also known as a second mortgage. On the other hand, if you have to pay for recurrent expenses over a period of time, there can’t be an alternative to a home equity line of credit, also known as HELOC.
Several other factors may help you decide between a home equity loan and a line of credit. For example, you may have to choose between the security of a fixed monthly payment and the convenience of a lower monthly payment. While HELOC may offer a faster access to a reserve of cash as and when you need it, you might be tempted to withdraw more than you can afford and end up defaulting on your payment.
Here are some of the questions to ask before need to decide between a home equity loan and a line of credit.
Do I need it for a short term purpose or a long term one?
You need a large amount of money for a wedding ceremony or travel expenses. A home equity loan will be ideal for such short term purposes. On the other hand, a line of credit suits the best when you need to spend money over a period of time, say to pay for education or home remodeling. With a HELOC, you get access to a cash reserve that remains available for a long period of time.
Do I need to pay at once or recurrently?
If you are renovating, you might need to withdraw cash periodically to pay contractors. If your child is pursuing education at a college, you will need to pay for the tuition fee every semester. Such recurrent expenses can only be met with a suitable line of credit. On the other hand, things that require one-time payment, such as debt consolidation, are among the reasons why you should consider a second mortgage.
Can I handle two big monthly payments simultaneously?
Don’t forget you already have a debt to pay off. The money you owe on the first mortgage must be paid off to get full ownership of your home. With a second mortgage, you might face difficulty in making payments each month. A HELOC is a better option in this situation as the monthly payment will be much lower because of the variable rate of interest. A cash-out refinance can even be a much better option as it eliminates the necessity of two separate payments every month.
Can I behave responsibly in financial matters?
A home equity line of credit offers you a quick and easy access to a reserve of cash. The convenience can often become an excuse for you to behave irresponsibly in financial matters. If you think a line of credit can tempt you to use the money carelessly, then you would probably want to choose a home equity loan instead.