How to Understand the Difference Between a Home Equity Loan and a Home Equity Line of Credit (HELOC)

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Which home loan is right for you?
Which home loan is right for you? (Image: Maj-Britt Høiaas Lassen)

What's the difference between a home equity loan and a home equity line of credit? Learn the advantages of each loan to figure out which one is right for you.

For starters, to obtain an accurate comparison of home equity loans and lines of credit, you must understand the key advantages of each type of home loan. The advantages of each are unique and their subsequent terms and conditions make choosing the right one important. Also, the value of your home and the amount of your mortgage, may effect the loan rates that you are offered and that may make a difference in the type of loan that you choose.

Next, understand that the advantages of a HELOC, or home equity line of credit, include interest only payments during the draw period, the opportunity to borrow additional funds at a later date, and the ability to secure a line of credit for future use. Many HELOC loans offer a borrower the ability to make interest only payments while in the draw period. These interest only payments are usually substantially less than a payment that includes full repayment of the interest and principal balance. This allows the homeowner to make lower monthly payments initially and pay back the principal or refinance the loan amount at some future date. They also offer the borrower the option of taking additional advances against their home's equity. If you aren't sure how much money you need to borrow right now, these loans offer the perfect opportunity to secure a line of credit without having to incur the interest expenses that come with a regular home equity loan.

Finally, be aware that the advantages of a low rate home equity loan are a fixed monthly payment amount, a preset repayment term, and the immediate receipt of your loan's proceeds. A fixed payment every month allows the budget conscious homeowner to plan ahead for the monthly payments on their new loan. There is no variation in this payment amount and it's easier to pay over time as the borrower increases their annual income. The repayment terms for most home equity loans are fixed and must be paid off by a certain date. This makes it easier for the borrower to forecast their future income obligations and allows them to plan for life events, such as retirement. Also, immediate disbursement of loan proceeds offers the borrower an opportunity to get the cash they need as soon as their loan closes with no further delays in funding.

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