Tuesday, March 14, 2023 / by Phil Karp
A home equity loan and a home equity line of credit (HELOC) are both types of loans that allow you to borrow against the equity in your home. However, there are some key differences between the two:
A home equity loan is a lump sum of money that is borrowed against the equity in your home and is repaid in fixed monthly payments over a set period of time. On the other hand, a HELOC is a revolving line of credit that allows you to borrow money as you need it, up to a set credit limit. You can borrow and repay money from a HELOC throughout the term of the loan.
The interest rate for a home equity loan is usually fixed, which means it remains the same throughout the life of the loan. In contrast, the interest rate for a HELOC is usually variable, which means it can fluctuate based on market conditions.
Both types of loans may come with fees, such as application fees, appraisal fees, and closing costs. However, HELOCs may also come with ongoing fees, such as annual fees or transaction fees.
With a home equity loan, you are required to make fixed monthly payments until the loan is paid off. With a HELOC, you have more flexibility in your repayment schedule, as long as you make the minimum payment required each month. However, with a HELOC, you also have the risk of falling into a debt spiral if you continuously borrow without repaying enough, as the interest charged on the borrowed amount can accumulate quickly.
In summary, a home equity loan is a one-time lump sum borrowed against the equity in your home, with a fixed interest rate and fixed payments, while a HELOC is a revolving line of credit with a variable interest rate and more flexibility in repayment, but also with the risk of debt accumulation if not handled properly.