Home equity loans and lines of credit (HELOC) provide cash from home equity for a variety of purposes. Interest rates for HELOCs are typically variable while mortgage rates for a home equity loan are usually (but not always) fixed for the duration of the loan. Understanding the difference between home equity lines and home equity loans is your first step for determining which option works best for your situation.
Know the Difference between a HELOC and a Home Equity Loan
There are two types of home equity financing. A home equity loan, sometimes called a second mortgage, is similar to your primary mortgage; it is a loan for a specified amount and interest rate, and is repaid and amortized over a specific time period. A home equity loan can be used for one-time expenses of known amounts; examples include debt consolidation or buying a vehicle.
A HELOC is a line of credit secured by your home. Home equity lines allow you to draw on your credit line as needed. Home equity lines are typically written with variable interest rates. Some HELOCs allow for interest-only payments; this keeps payments lower, but the amounts borrowed won’t decrease.
The Purpose of Your Home Equity Financing
Choosing which type of home equity financing best meets your needs depends on how you want to use the funds. HELOCs provide cash as needed for “pay as you go” expenses such as home improvements and college tuition. A home equity line can also provide back-up in case of unexpected expenses. You borrow only what you need when you need it, and pay interest only on what you borrow.
Your Home Is Collateral for Home Equity Lines and Loans
While home equity lines and loans provide a less costly source of cash than refinancing, personal loan, or unsecured consumer loans, the FTC cautions that your home serves as collateral for home equity financing. Home equity lenders can foreclose if you fail to repay amounts borrowed.
Comparing home equity rates and terms is a first step toward finding your best home equity loan or HELOC.