• Mya K

What is the Difference? : Home Equity Loan & Home Equity Line of Credit (HELOC)

Here you are on a debt free journey. Summer is here and you’ve been talking to friends, family and co-workers about different projects and events that are going on. You are also talking about how you are making them happen. Someone may have mentioned how they took out a home equity loan to finance their kitchen remodel, family reunion arrangements or consolidate credit card debt. A home equity loan sounds like a good way to take care of some big expenses. Depending on your unique financial situation, a home equity loan could be a good option.


One of the main questions most people come to me with is, what’s the difference between a home equity loan and a home equity line of credit?


First, let’s start with what is similar about the two.


(NOTE:…you have to be a homeowner. If you are renting a home -even if it’s from family, if your name is not on the deed - you cannot apply for a home equity loan. I say that because I have seen request for this in the past.)

 

Equity is the difference between how much you owe on your home and the home’s value.

 

Both of these are taking available equity from your home to borrower against. In a nutshell, equity is the difference between how much you owe on your home and the home’s value. For example, if your home is worth $100,000 and you owe $75,000 then you have $25,000 in equity available to you.


Here is how they are different…


Home Equity Loans are fixed rate loans. This means the rate will not change during the life of the loan. You go through the loan process and are given the money at closing in a lump sum. So, in the example above, you’ll get a check in the amount of $25,000. You then have an amortized monthly payment over the life of your loan until it is paid in full.


HELOCs on the other hand are variable rate loans. This means the rate can change during the life of the loan. After you go through the loan process you have a line of credit available to you to use. Again, with the above example, your line of credit will be for $25,000. Since it is a line, you are given a draw period that you can use to draw money from the line and repay by making interest only payments. I’ve seen these draw periods range from 5 yrs -15 yrs. Generally, you can draw as little or as much of your available line as you’d like. (Some lenders may have a minimum draw amount) At the end of your draw period, your loan goes into an amortized monthly payment like the home equity loan where you have a set monthly payment to repay the loan in full.


Now that you know the similarities and differences, you can better ask lenders questions to find out which of these products is best for you.

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