Home Equity Line vs. Loan

Explore the differences between a home equity loan and line of credit

Both a home equity loan and a home equity line of credit use your home as collateral, however there are some key differences to be aware of when choosing between the two. Explore some of the differences below to help you decide which loan option is right for you.

Home Equity Line of Credit

A Home Equity Line of Credit (or HELOC) is a revolving line of credit that lets you borrow what you need and take advantage of flexible repayment options. So as you pay down your balance, you can access that money again, if needed.

A HELOC lets you make principal and interest or in some cases, depending on the lender, interest only payments on the portion of the line you use during the draw period. Each time you borrow from your line of credit, it's called a "draw." The draw period is typically 10 years, and during that time you can access your funds as needed, often times through your lender's online banking system, via checks or at a branch. Once your draw period ends, you will enter into a repayment period with principal and interest payments being required on the outstanding balance. If you had the option to make interest only payments during your draw period, be mindful that your payments will increase when you enter repayment.

Home equity lines have variable rates that are typically tied to an index such as the Prime Rate. If the Prime Rate changes then your rate (and monthly payments) would change. However, these rates are often lower than home equity loans or other loan rates.

Home Equity Loan

A home equity loan is a "typical" loan where you receive all the funds in one lump sum and need to begin making equal monthly payments of both principal and interest right away. Unlike with a HELOC, you are not able to reuse the funds once they are paid back and there is not an interest only payment option.

Another difference with a home equity loan vs. line is that the interest rate for a loan is fixed so your rate and monthly payments will stay the same throughout the life of the loan. However, these rates are typically higher than on a HELOC.

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