Home Equity Loans Versus Home Equity Line of Credit (HELOC)

heloc or home equity loanMany homeowners have a hard time differentiating between a home equity loan and a home equity line of credit.  Both of these methods are ways of borrowing against your home’s equity.  However, there are major differences between the two methods:

A home equity loan is a loan secured through taking out a second mortgage.  Taking out a home equity loan will allow you to borrow against your home’s equity.  When you have a home equity loan, you will receive a lump sum of funds; you’ll need to repay this loan over the next several years through monthly payments.  You’ll pay interest on the loan’s balance every month until your debt is fully repaid.  Taking out a home equity loan is a great way to pay for a large expense that needs to be paid off all at once.

By contrast, a home equity line of credit is opening a line of credit that uses the home as collateral.  You will be able to access your funds through paper checks, a plastic card or both.  By using one or both of these, you will be able to draw against this line of credit that has been established based on your home.  The more money you withdraw, the more your line of credit will be reduced.  In general, this type of loan is more flexible than a home equity loan.

Both are good options for borrowing against your home’s equity.  The main difference, though, is how quickly the funds need to be used.  If the funds need to be used all at once and immediately, you’re better off with a home equity loan.  If the funds need to be spread out over a long period of time, you’re better off with a home equity line of credit.