Home Equity Loans vs. Home Equity Line of Credit - What's the Difference?

Home equity loans and home equity lines of credit are very beneficial, and can provide homeowners with quick cash for a variety of purposes. Although similar, there are key differences that make these loans unique. Before using your home's equity for home improvement, debt consolidation, etc., compare both options.

What is a Home Equity Loan?

Home equity loans are similar to other types of personal loans. The majority of personal loans are secured. Usually, an applicant will provide the lender with a vehicle title or other valuable piece of property. With a home equity loan, your home is the collateral.

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Home values are constantly increasing. Moreover, mortgage principles decrease. The difference between a home's value and the amount owed to the mortgage lender equals the equity. For example, if your home is valued at $130,000, and you owe the mortgage lender $80,000, the home's equity totals $50,000. With a home equity loan, the homebuyer may choose to access all, or part of the home's equity.

Benefits of Home Equity Loans

The majority of home equity loans have fixed rates and payments. Secondly, the money is acquired as a lump sum. Once the homeowner receives the funds, the money can be used for any purpose. The average term of a home equity loan is 15 years. However, homeowners have the option of repaying the money sooner.

What is a Home Equity Line of Credit?

Similarly, home equity lines of credit are based on the home's equity. Instead of funds being received in one lump sum, lines of credit entail revolving credit accounts. If approved for an equity line of credit of $50,000, a credit line is established for this amount, and homeowners may withdraw funds as needed.

Lines of credit can be compared to credit card cash advances. However, the rates are much lower on a line of credit. The length of a line of credit is usually ten years. At the end of the term, the homebuyer may choose to apply for another credit line. Because the rates are variable, payments are not predictable. To avoid high monthly bills, homeowner must quickly repay the money, and withdraw small amounts.

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