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Home Equity Loans vs. Credit Cards: Which is Better?

Home equity loans and HELOCs are often more affordable than credit cards, but they’re not always the best option.

Terayut Chaiseron/Getty Images

When you need money, it can be tempting to turn to credit cards. They are a familiar option, they are easy to use and most people have at least one But if you’re a homeowner, you have a funding option that can often be much more cost-effective: Tapping into your home equity.

Often, home equity products are preferred Home equity loan And Home Equity Lines of Credit (HELOCs) More cost-effective than credit cards when financing a large purchase or other expense. But they are not always the best option. In this article, we’ll explore the differences between these products and when one might be better than the other.

Start by exploring your home equity options here to learn more.

What are home equity loans and HELOCs?

Both home equity loans and HELOCs allow you to borrow from your home equity (the value your home has built up) for anything you want.

A home equity loan gives you a lump sum to repay in monthly installments, starting after you receive the funds. A HELOC works like a credit card. You get a line of credit that you can draw on anytime during the draw period, which is usually between five and 10 years. Unlike credit cards, you don’t have to start paying immediately. Once the draw period is over, you must start paying back the amount you borrowed from the line of credit.

For both products, your home acts as a security. If you default, you could lose your home. Missed payments and late payments can also Hurt your credit score. Don’t borrow more than you can comfortably repay with a home equity loan or HELOC (the same goes for credit cards, of course).

Find out how much you can borrow here.

Home Equity Loan/HELOC vs. Credit Cards: Which is Better?

Home equity loans and HELOCs are often good choices for these reasons:

Lower interest rates: The average credit card interest rate is currently around 20%. Home equity loan And HELOC rates Less than half of that, averaging around 7% to 8% With differences that large, home equity loans and HELOCs are often clear winners.Large Borrowing Capacity: Depends on the amount and your home equity Credit score, you may be able to borrow several thousand dollars with a home equity loan or HELOC For comparison, the average American has access to roughly $30,000 across all their credit cards, according to Experian data. If you need more than that, home equity is the way to go.Potential tax benefits: If you use your home equity funds for IRS-approved home improvements, you may be able to deduct the interest on your tax return. “Home equity loan interest and lines of credit are deductible only when the borrowed funds are used to purchase, construct or substantially improve the taxpayer’s home that secures the loan,” the IRS says. “The loan must be secured by the taxpayer’s principal home or second home (qualified residence) and meet other requirements.”

That said, a credit card may make more sense for you if:

You don’t have much equity in your home: You can usually borrow 80% to 85% of your home equity with a home equity loan or HELOC. Home equity is based on Your current home value and outstanding mortgage balance. So, you won’t be able to borrow much if you only live in the home for a short time or if your home is depreciating.You need funds fast: A home equity loan or HELOC can take anywhere from two weeks to two months to close. If you need funds now, you may need to turn to a credit card.You don’t want to risk your home: While you shouldn’t borrow more than you can repay with any financing option, personal loans don’t use your home as collateral. If something happens and you can’t pay the loan, your home isn’t at risk.You can pay the balance immediately: Although credit card interest rates are higher than home equity products, this is not a factor if you can pay off your balance right away. If you can do this, you can avoid interest altogether.You can take advantage of a promotion: If your credit score is strong, you may qualify for a card with a 0% interest transfer bonus. You can charge the amount you need to a card, then transfer the balance to a 0% interest card before the first payment. As long as you can pay off the balance before the end of the promotional period, you won’t be charged any interest.

Explore your credit card options here now to learn more

Bottom line

When choosing between a home equity loan, HELOC or line of credit it is essential to evaluate your personal situation. All three methods can help you manage spending, but there are some key differences between home equity products and credit cards that can determine which one is best for you. Take the time to do your homework and run the numbers to make sure you’re choosing the right product for your needs.

Check current rates now to see if a home equity loan or HELOC is right for you

MoneyWatch: Managing Your Money

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