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Home equity loan vs. credit card: Which is better?

Home equity loans and HELOCs are often more affordable than credit cards, but they're not always the best option. TEERAYUT CHAISARN/Getty Images

When you need money, it can be tempting to turn to credit cards. They're a familiar option, they're 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 like home equity loans and home equity lines of credit (HELOCs) are more affordable than credit cards when financing a large purchase or other expense. But they're 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?

Home equity loans and HELOCs both allow you to borrow from your home equity (the value you've built in your home) for anything you like.

A home equity loan gives you a lump sum you pay off in monthly installments, beginning after you receive the funds. A HELOC works like a credit card. You receive a line of credit you can draw from any time during the draw period, which is typically between five and 10 years. Unlike a credit card, you don't need to begin repaying immediately. Once the draw period ends, you must begin 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. Never borrow more with a home equity loan or HELOC than you can comfortably afford to repay (this is also the case with credit cards, of course).

Find out how much you might be able to borrow here.

Home equity loan/HELOC vs. credit cards: Which is better?

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

  • Lower interest rates: Average credit card interest rates are currently around 20%. Home equity loan and HELOC rates are less than half that, averaging about 7% to 8%. With the difference that big, home equity loans and HELOCs are often the clear winners.
  • Ability to borrow a large amount: Depending on your home equity amount and credit score, you may be able to borrow hundreds of thousands of dollars with a home equity loan or HELOC. To compare, 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 to make IRS-approved home improvements, you may be able to deduct the interest on your tax return. "Interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan," the IRS says. "The loan must be secured by the taxpayer's main home or second home (qualified residence), and meet other requirements."

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

  • You don't have much equity in your home: You can typically 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 may not be able to borrow much if you've only lived in the home for a short while or your home's value has depreciated.
  • You need funds fast: It can take two weeks to two months to close on a home equity loan or HELOC. 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 repay with any financing option, personal loans don't use your home as collateral. Should something happen and you can't repay the loan, your home won't be at risk.
  • You can pay off the balance immediately: While credit card interest rates are higher than home equity products, this isn't a factor if you can pay off your balance right away. If you can do this, you'll avoid incurring 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 one card, then transfer the balance to the 0% interest card before the first payment is due. As long as you can repay the balance before the promotional period expires, you won't incur any interest charges.

Explore your credit card options here now to learn more.

The bottom line

It's essential to evaluate your personal situation when choosing between a home equity loan, HELOC or credit. All three methods can help you finance expenses, but home equity products and credit cards have some key differences that can determine which 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.

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