Choosing a Home Improvement Loan
or an Equity Line of Credit

Deciding between a home improvement loan
or equity line of credit

Most people who are looking for a home improvement loan don’t even consider the possibility of an equity line of credit unless the lender mentions it. There are some circumstances where this type of funding may actually be a cheaper way to go when you are making home improvements.

Loan vs. line of credit

Why would you choose an equity line of credit over a home improvement loan ? Both require equity in your home and in reality both will accomplish the same purpose. The difference is that with a loan all of the funds are disbursed at the same time, and you pay a monthly payment based on the funds you borrowed even if you don’t use the money until some months later.

With an equity line of credit you draw against the funds as they are needed. There are circumstances when one would be preferable over the other based upon the way the home improvements are being completed.

When is an equity line of credit preferable to a home improvement loan?

For most people a home improvement loan works better than an equity line of credit because everything is broken down evenly, and they know what to expect in monthly payments. However, if you are doing home improvements yourself, an equity line of credit may work better for you. These loans work like a credit card in that you are given a maximum amount you can spend, and your monthly payments are based upon your outstanding balance rather than the maximum funds you can use.

If you are planning to spread your project out over time, an equity line of credit may work better for you than a loan with a fixed funding amount. Since you will only be using a portion of the available funds at one time, you will only pay interest and payments based upon the outstanding balance. For those who prefer to do their own home improvements, this provides the money that is necessary for materials. For those who plan to hire a contractor to do their home improvements, a loan is likely to be the preferred choice.

Both choices will accomplish the same purpose

Is there a reason to choose a home improvement loan over an equity line of credit? Both types of loans will allow you to pay for home improvements—the difference lies solely in the way the funds are distributed and payments and interest assessed. Some homeowners prefer a fixed payment every month so that they know exactly what to expect while others like the flexibility of using the funds when they need them and paying only for the outstanding balance.

The choice is one of personal preference and has nothing to do with what works better in a given situation. It is easier to obtain additional funding with an equity line of credit as your home’s value increases opposed to a loan that must be refinanced in order to obtain additional funding. Remember that whichever option you choose, your home’s equity will be the collateral for the loan.

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