If you own a home, you’re familiar with the home equity line of credit (often called a HELOC). But maybe you have some questions – you don’t understand the difference between a HELOC and a home equity loan, or you don’t know how to get your hands on either. Consider this your crash course.
Before we tackle the difference between these two products, let’s start with how they’re similar: both are secured loans, which means you’re putting up your home as collateral for the money you borrow. Both offer fairly low interest rates and both require equity in your home. Essentially, these products are second mortgages: You’re borrowing the equity in your home to use the cash.
The difference is that with a home equity loan, you receive a lump sum and pay it off on a monthly basis over a set period of time. The interest rate and monthly payment will be fixed for the life of the loan. You may want a home equity loan if you need a large chunk of money at once – to consolidate credit card debt or make home improvements, which is the original purpose of this kind of loan.
A HELOC is a little more complicated. It’s a pot of available money that you can draw on as you need it. Sort of like a checking account or, more accurately, a credit card, because you pay interest on the money you borrow. You’ll be given a checkbook to access the money, and a maximum amount you can borrow, but you don’t have to use it all, and you won’t pay interest on the portion you don’t tap.
The interest rate on a HELOC is generally variable, which means your monthly payment will vary as well. If you want some money in your back pocket in case you ever need it – sort of like an extra emergency fund – you may be a good candidate for a HELOC. They also tend to be good for home improvements, vacations, student loans, or really any major purchase
If you’re interested in a HELOC or home equity loan feel free to contact us.