HEL vs. HELOC
A HEL, home equity loan, and a HELOC, home equity line of credit, are two ways homeowners access equity from their homes. A HEL is a second loan against a homeowner's property, while a HELOC is a line of credit a homeowner has access to.
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Description
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HELOCs are similar to credit cards, although the debt is secured by the borrower's home. A borrower has a maximum borrowing limit. The borrower withdraws money as needed and is required to pay a minimum monthly payment, but is allowed to pay it off in full at any time. HELOCs have variable interest rates. HELS work like a regular mortgage. The borrower receives one lump sum of money and has a fixed payment schedule. The monthly payments are the same each month and the loan amortizes causing the loan to be paid off by the specified date. The terms for a HEL are typically 10 to 15 years.
Uses
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HELOCs are generally used for ongoing cash needs. They are used for paying off bills, college tuition or medical bills. HELs are generally used for a one-time specific need such as purchasing a car or paying for a major renovation of some kind.
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Costs
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HELOCs generally begin with a lower interest rate than HELs, but are subjective to change because they are variable; therefore they pose a greater interest rate risk than HELs. HELOCs typically do not have closing costs, whereas HELs do. HELs are offered at either a variable rate or fixed rate.
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