A home equity loan and a home equity line of credit (HELOC) are both types of loans that are secured by a borrower’s home. However, there are some key differences between a home equity loan and a HELOC.
A home equity loan is a fixed-term loan that is granted by a lender to a borrower based on the equity in their home. The interest rates are fixed for the life of the loan. In the short term, the rate on a home equity loan may be higher than a HELOC, but you are paying for the predictability of a fixed rate. The borrower applies for a set amount that they need, and if approved, receives that amount in a lump sum upfront. The borrower must then make fixed payments over the life of the loan, which typically comes with fixed interest rates.
On the other hand, a HELOC is a revolving line of credit that uses your home as collateral and can be used and paid off over and over again, similar to a credit card. It is a secured loan, with the accountholder’s home serving as the security.
HELOCs come with variable interest rates and, as a result, variable minimum payment amounts. The draw periods of HELOCs allow borrowers to withdraw funds from their credit lines as long as they make interest payments.
Here are some key differences between home equity loans and HELOCs:
|Home Equity Loan||HELOC|
|Fixed-term loan||Revolving line of credit|
|Fixed interest rates||Variable interest rates|
|Lump sum upfront||Withdraw funds as needed|
|Fixed payments over life of loan||Variable minimum payment amounts|
|Secured by home||Secured by home|
It is important to note that each lender has its own requirements and terms for both types of loans, so it’s best to check with them directly to see what their specific qualifications are.