Home Equity Line of Credit vs. Home Equity Loan: What's the Difference?

By Karen Lawson CMR Columnist

You open your credit card bills and want to scream. Interest rates and fees seem to go up every month, while your balances stay about the same. You want to pay off consumer debt, but you also need to remodel your home and send your daughter to college. Should you get a home equity line of credit (HELOC) or traditional home equity loan? What's the difference, and how do these options impact your home equity?

Home Equity Option 1: Cash Anytime from a HELOC

A HELOC differs from a home equity loan in that it is a credit line secured by your home's equity. You can withdraw funds against your credit line as needed. HELOCs generally have adjustable rates, as rates change over time. Your payment can adjust according to how much credit you use and prevailing interest rates.

When applying for a HELOC, it's important know the following:

  • How you will access your credit line (by check, direct deposit, ATM card)
  • The term of your line of credit, the amount or credit limit, and how interest is calculated
  • How much and how often your payments will be, and when they will change

Home Equity Option 2: A Lump Sum from a Home Equity Loan

If you have a large, one-time expense, such as a remodeling job, a home equity loan may work for you. This type of loan is similar to your first mortgage. You borrow a set amount and repay it over a specified period of time, usually with monthly payments. A home equity loan may be fully amortized, or it may have a balloon payment. Read your loan documents and disclosure statement carefully, and ask questions of your lender and/or financial advisor.

Home equity loans and lines of credit can be great tools for putting your financial house in order.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She earned and MA degree in English from the University of Nevada, Reno.

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