Homeowners have two major home equity borrowing options: the home equity loan and the home equity line of credit (HELOC). Both options allow homeowners to take out a loan based on the existing equity in their properties. In both cases, the property is used as collateral and may be foreclosed upon should the borrower default on the loan.

Home Equity Loans

Home equity loans are dispersed in a single lump sum. The borrower walks away with a check for the total amount. Home equity loans have a fixed interest rate for the life of the loan – the borrower knows exactly how much his monthly payments will be ahead of time. Home equity loans are often a smart choice for borrowers who need upfront money for expenses such as credit card debt consolidation or a single medical bill.

Home Equity Lines of Credit

A home equity line of credit (HELOC) is similar to a credit card. Instead of being handed a single check, a borrower can withdraw from the credit line whenever money is needed. HELOCs generally have a set draw period between 5 and 10 years. After the draw period, the borrower must either pay back the balance in full (a balloon payment) or enter a 5 to 10 year repayment period. HELOCs have variable interest rates generally tied to the national prime rate. That means, a borrower’s monthly interest charges will change from month to month. HELOCs are often a smart choice for borrowers who want to have a reserve for emergencies or need money for ongoing projects such as home renovation.

Home Equity Comparison Chart

Choosing a Loan

Both HELOCs and home equity loans have their own strengths. There is no universal “best choice.” When making your decision, take into consideration what the money is needed for, as well as your financial ability to deal with variable rates.

See Also:

Is a HELOC Right for You?

How a HELOC Works