Home Equity Loan VS Home Equity Lines of Credits
Home equity loans and home equity lines of credit are sometimes both referred to as second mortgages. However, despite being similar in some ways, these two types of loans have their differences.
Here are the differences between home equity loans and home equity lines of credit.
What is a Home Equity Loan?
A home equity loan is a one-time loan that is secured by your property. It is typically paid off over a period of time between five and fifteen years. There is a fixed interest rate and fixed payments that need to be made each month. When you get a home equity loan, you borrow a specific amount of money. You cannot borrow further from the loan.
What is a Home Equity Line of Credit?
A home equity loan of credit (HELOC) allows you to borrow money more like you would on a credit card. When you get a line of credit, you are given an amount that you can borrow up to and a period of time to use the loan. You are then able to use as much or as little of the loan as you need. As you pay back the loan, you are able to borrow the money again.
For example, if you are given a $15,000 home equity line of credit and you borrow $5,000 from it, you have $10,000 in additional money available to borrow. If you pay back $2,500 of the money you borrowed, you would then have $12,500 available to you for the duration of the loan period.
A home equity line of credit usually has a variable interest rate. The payment schedule will depend on how much you have borrowed. Once the period of time set by the line of credit expires, you need to have paid back what you owe in full.
Which is Right for You?
This depends on your particular situation. If you know that you will need a specific amount of money at a specific time, then a home equity loan is generally the better option. This is because a home equity loan lets you borrow that money and pay it back over a period of time.
However, if you are unsure of how much money you will need or if you need money over a staggered period of time, then a line of credit is likely the better option. You can get a line of credit, borrow from it as needed and only pay back the amount that you use, rather than having to pay back the full amount.
If you are planning on borrowing smaller amounts and paying them back relatively quickly, you’ll also find that a home equity line of credit will probably cost you less money overall.
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