A Home Equity Loan and a Home Equity Line of Credit (HELOC) are two financial products that allow homeowners to borrow against the equity built up in their property. However, they have distinct characteristics and serve different purposes.
A Home Equity Loan is often referred to as a second mortgage. This type of loan provides a lump sum of money, which is typically disbursed at a fixed interest rate. Borrowers repay this amount over a set period, usually through monthly payments that include both principal and interest. This option is ideal for those who need a specific amount of cash upfront for major expenses, such as home renovations, debt consolidation, or significant purchases.
On the other hand, a Home Equity Line of Credit functions more like a credit card. It offers a revolving line of credit that homeowners can draw from as needed, up to a predetermined limit. The interest rates on HELOCs are generally variable, meaning they can fluctuate over time. Borrowers can withdraw funds during a draw period, which often lasts several years, and only pay interest on the amount they actually use. This flexibility makes a HELOC suitable for ongoing expenses or projects, such as funding education or covering unexpected costs.
In summary, while both a Home Equity Loan and a HELOC allow homeowners to leverage their property’s equity, the former provides a one-time lump sum with fixed repayment terms, and the latter offers a flexible credit line with variable interest rates. Understanding these differences can help homeowners choose the option that best fits their financial needs and goals.