Home equity loans and home equity lines of credit are differing ways to use the equity in your home to refinance or get cash out of your home for business purposes, repairs, bill consolidation or education.
A home equity loan is a closed-end loan where the equity built up in a home is used as collateral. The money is received in a lump sum and the amount is based on credit history and a variety of other factors. It is possible to obtain more than a home is worth, depending on where you live.
The loan is usually for a shorter period of time than a loan, usually up to 15 years. The payments are fixed, and these loans also have a fixed interest rate.
On the other end of the spectrum, a home equity line of credit, otherwise known as a HELOC, is an opened ended loan, very similar to that of a credit card. Again, the home serves as the collateral for the loan.
The homeowner can choose when to take out funds from the HELOC (up to the limit of the line of credit.) The payments are made monthly and the lines of credit can revolve for up to 30 years.
The interest rates for a HELOC can vary depending on the prime interest rate and the homeowner's personal credit history.
These home equity loans are also called second mortgages because the homeowner must jump through similar hoops to obtain these loans. They must pay origination costs, appraisal fees and closing costs, depending on the type of loan. They could also lose their homes if they default on these loans.
Just like with a mortgage, homeowners should shop around for the best rate and lender possible. When done right, these types of loans can help simplify the homeowner's finances. However, the same type of heartaches can occur if proper care is not taken to find the best rate and terms possible.
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