A Home Equity Line of Credit and a Home Equity Loan are both forms of borrowing that allow homeowners to tap into the equity they have built up in their property.
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However, there are key differences between the two :
1. Structure of Borrowing:
- HELOC: A HELOC is a revolving line of credit, similar to a credit card. It provides you with a predetermined credit limit, and you can borrow from it as needed during the draw period. You only pay interest on the amount you've borrowed. Once the draw period ends, the repayment period begins, during which you cannot borrow further and must repay both principal and interest on the outstanding balance.
- Home Equity Loan: A home equity loan, also known as a second mortgage, provides you with a lump sum of money upfront. You receive the entire loan amount at once and start making regular monthly payments, including both principal and interest, over a fixed term.
2. Repayment Terms:
- HELOC: During the draw period, which typically lasts 5 to 10 years, you generally make interest-only payments. After the draw period ends, you enter the repayment period, usually lasting 10 to 20 years, during which you repay the principal and interest. The interest rate on a HELOC is often variable, meaning it can fluctuate over time.
2. Home Equity Loan: With a home equity loan, you start making regular monthly payments that include both principal and interest from the beginning. The interest rate is often fixed, providing a stable payment amount throughout the loan term.
3. Accessing Funds:
- HELOC: You can access funds from a HELOC as needed during the draw period. This flexibility allows you to borrow multiple times, repay, and borrow again within the credit limit. You can typically access the funds through checks, credit cards, or online transfers.
- Home Equity Loan: A home equity loan provides you with a lump sum upfront, and you cannot borrow additional funds once the loan is disbursed.
4. Interest Rates:
- HELOC: HELOCs usually have variable interest rates, which are often tied to a benchmark rate like the prime rate. The interest rate can fluctuate over time, potentially affecting your monthly payments.
- Home Equity Loan: Home equity loans often have fixed interest rates, providing a predictable payment amount throughout the loan term.
5. Purpose of Use:
- HELOC: HELOC funds can be used for various purposes, such as home improvements, debt consolidation, education expenses, or emergency funds. The flexibility to borrow as needed allows you to use the funds over time.
- Home Equity Loan: Home equity loans are typically used for specific purposes, such as major home renovations, large purchases, or debt consolidation.
It's important to carefully consider your financial needs, goals, and preferences when deciding between a HELOC and a home equity loan. Evaluate the terms, interest rates, repayment options, and potential risks associated with each option before making a decision.
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