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Home Equity Loan Vs Line of Credit, What is the Difference Between Them?

A home equity loan provides a lump sum with a fixed interest rate, ideal for one-time expenses, while a home equity line of credit (HELOC) offers a flexible revolving credit line with variable rates, suitable for ongoing or varying financial needs.

by Tamilchandran

Updated Dec 06, 2023

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Home Equity Loan Vs Line of Credit, What is the Difference Between Them?

Home Equity Loan Vs. Line of Credit

Home Equity Loans and home equity lines of credit (HELOCs) are both secured by a borrower's home, utilizing the equity as collateral. Equity, the difference between the mortgage balance and the home's market value, allows borrowers to access funds, typically up to 85% of their home's equity. While both options offer better interest terms than unsecured debt, such as credit cards, caution is advised, as failure to repay a home equity loan or HELOC can lead to the risk of losing one's home.

A home equity loan involves fixed payments and a stable interest rate throughout the loan term, providing predictability for borrowers. On the other hand, HELOCs offer revolving credit lines with variable interest rates and minimum payment amounts, allowing flexibility in accessing funds during draw periods.

It's essential for consumers to recognize the risk associated with using their homes as collateral, emphasizing the need for responsible financial management to avoid potential repercussions, including the loss of their home.

Also Read>> How Long Are HELOC Loans?

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What is the Difference Between Home Equity Loan and Home Equity Line of Credit?

The key differences between a Home Equity Loan and a Home Equity Line of Credit (HELOC) lie in their interest rates, availability of cash at closing, and the flexibility to draw money. A home equity loan typically offers a fixed interest rate with a lump sum of cash at closing, while a HELOC may have an adjustable interest rate, provides flexibility to draw money as needed during draw periods, and incurs interest only on the amount used.

Feature Home Equity Loan (HELOAN) Home Equity Line of Credit (HELOC)
Interest Rate Fixed Adjustable, with an option for a fixed rate
Fixed Interest Rate     Offers a stable interest rate

Usually has an adjustable rate, but may provide a fixed rate for a part of the balance

Cash Availability Lump sum at closing Access funds as needed up to the credit limit
Repayment Structure Fixed monthly installments Flexible payments based on outstanding balance
Interest Payment On the entire loan amount, regardless of usage Only on the amount of money drawn
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Is Home Equity Loan Same as Home Loan?

No, a Home Equity Loan (HELOAN) is not the same as a Home Loan. A Home Loan, also known as a mortgage, is used to finance the purchase of a home, providing funds to buy the property. In contrast, a Home Equity Loan is a separate loan that allows homeowners to borrow against the equity they have built in their home, using the property as collateral.

While both involve borrowing against the home, they serve different purposes – a Home Loan is for property acquisition, and a Home Equity Loan is for accessing cash based on the home's equity.

MarketsHost offers a comprehensive and user-friendly guide to Loans, providing you with the insights necessary to embark on a successful financial journey.

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What Are the Pros and Cons of a Home Equity Loan?

Navigating the realm of home equity loans involves weighing the advantages and disadvantages carefully. On one hand, stable interest rates and potential tax benefits make it an appealing financing option. However, the risk of foreclosure, closing costs, and increased monthly payments add layers of consideration for borrowers.

Pros of a Home Equity Loan

  • Home equity loans offer a fixed interest rate, providing predictability as the rate remains constant throughout the loan term.
  • With a fixed interest rate, monthly mortgage payments remain consistent, facilitating easier budgeting over the life of the loan.
  • Home equity loans typically have lower interest rates compared to unsecured loans, making them a cost-effective borrowing option.
  • Home equity loans come with extended repayment timelines, spanning up to 30 years, leading to more manageable monthly payments.

Cons of a Home Equity Loan

  • Non-repayment can lead to foreclosure, jeopardizing homeownership and causing long-term damage to credit.
  • Typically requires at least 20% equity, making it inaccessible for new homeowners or those with minimal down payments.
  • Home equity loans involve additional charges such as origination and appraisal fees.
  • Processing and receiving funds take longer compared to personal loans, making it less suitable for those in need of immediate cash.

What Are the Pros and Cons of Line of Credit?

Exploring the advantages and drawbacks of a line of credit unveils a financial landscape marked by flexibility and potential cost savings. While lower interest rates and tax-deductible interest payments stand as enticing benefits, the variable nature of rates and the risk of placing one's home as collateral add layers of consideration for borrowers.

Pros of a Line of Credit

  • Typically offers lower interest rates compared to unsecured credit options, reducing the overall cost of borrowing.
  • Provides flexibility in accessing funds, allowing borrowers to draw as needed up to a predetermined limit.
  • Interest payments may be tax-deductible, especially if the funds are used for home improvements, potentially reducing overall tax liability.

Cons of a Line of Credit

  • Involves variable interest rates, making monthly payments unpredictable and subject to market fluctuations.
  • Puts the home at risk as collateral, with non-repayment potentially leading to foreclosure.
  • Continuous borrowing can deplete the equity cushion, limiting the financial buffer in the home.

Read More>> Best HELOC Rates of October 2023

Home Equity Loan Vs Line of Credit - FAQs

1. What is the primary difference between a Home Equity Loan and a Home Equity Line of Credit (HELOC)?

Home Equity Loans provide a lump sum, while HELOCs offer a revolving line of credit.

2. Are Home Equity Loans and Home Loans (Mortgages) the same?

No, they serve different purposes; home equity loans use existing home equity, while mortgages are for home purchase.

3. What's a key advantage of Home Equity Loans?

They typically have lower interest rates and can be tax-deductible in some cases.

4. What's a potential downside of using a Line of Credit (LOC)?

LOCs may have high interest rates, and their costs can be unpredictable due to variable rates.

5. How can borrowers reduce the risk of defaulting on a Home Equity Loan?

Borrow responsibly and avoid borrowing more than necessary to prevent financial instability or foreclosure.

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