Home equity vs. credit cards: Which is the better option?

When individuals are in a tough spot financially, they tend to explore all of their available credit options before turning to a traditional loan. The most common types of financing they turn to include credit cards, home equity loans and home equity lines of credit. Each of these options comes with its own set of benefits and drawbacks, and it's crucial to examine each alternative before making a decision.

Home equity loans and lines of credit are both attached to how much equity you have built up in your home. However, they function very differently.

Home equity loans provide you with a fixed lump sum and a repayment period that may span from 10 to 15 years. The loan is attached to a fixed interest rate, which allows you to determine your monthly payments. Many borrowers who take out these loans have a fixed amount in mind that they need.

Home equity lines of credit, in contrast, work similarly to credit cards. Homeowners are extended up to a certain amount in equity, and individuals treat the loan as a revolving line of credit. They can borrow as much or as little as their limit allows and they have a monthly payment each billing cycle and a minimum amount they must pay. However, these lines of credit carry a variable interest rate that can make it difficult to calculate payments each month. Most borrowers who rely on lines of credit choose this type of financing if they don't know exactly how much they need to cover certain costs, such as medical expenses.

Credit cards are sometimes viewed as an alternative to these loans because they are safer. For example, if a borrower is having difficulties making credit card payments, they may be able to negotiate with lenders and explore other repayment options. However, those who default on home equity loans and lines of credit may not only risk losing the equity they have built up in their home investment, but may also risk losing their house. However, home equity loans are a popular option because the interest rates attached to these funds is typically lower than that of credit cards.

Before taking on any type of home equity loan, it's crucial to speak with a credit counselor or enroll in housing counseling to know all of the risks and scenarios associated with this type of borrowing. There may also be other more affordable and less risky options to cover costs than taking out a home equity loan.