How is a home equity line of credit different from a home equity loan?
Home equity credit uses the borrower’s home as collateral. The three main differences are: • Pricing. A line of credit usually has a variable interest rate while a loan may have fixed or variable interest rates. • Access. A line of credit allows ongoing access to your money over an extended period of time. As you repay the money you’ve used, those funds become available for you to use again. With a home equity loan, you get the money all at once then repay it over an extended period of time. Unlike a line of credit, you do not borrow, repay and borrow the funds again. • Payments. A home equity loan generally has fixed payments, which can make budgeting easier. A home equity line of credit generally has a variable payment during the draw period. During the repayment period, monthly payments include a fixed principal amount plus interest.
A home equity line of credit allows you access to a reserve of money that you have at your disposal. You will not have to make monthly payment until you actually access the money. You can borrow from the account at any time and will only pay interest on what you have outstanding. The line of credit allows you the freedom to access the money as needs arise such as home repairs, college tuition, vacation, medical bills and emergencies. A line of credit has a variable rate of interest which is based on the Wall Street Journal Prime Rate plus/minus a stated margin. A home equity loan (also called a second mortgage) allows you to borrow a set amount of money over a set number of years. A home equity loan has a fixed rate of interest. Since the rate is fixed the payment will remain constant over the life of the loan. Unlike the line of credit if you have a need for further money you will have to reapply rather than write a check from your available equity.
There are three main differences between the line of credit and the home equity loan. First of all, there is a difference in the interest rates you will receive. A home equity line of credit usually has a variable interest rate, while the loan has a fixed (or sometimes variable) rate throughout the life of the loan. Secondly, in a home equity line of credit, you are able to access your money anytime you like, so long as you pay back what you’ve used, but with the loan, you get all the money at once, and repay it over an extended period of time. In other words, with the line of credit you can borrow, repay, borrow repay as much as you like. Last, the home equity loan usually has fixed payments so that you will know what your payment is every month, while the home equity line of credit can vary based on the interest rate and the amount you owe.
