The Difference Between Home Equity Loan And Home Line Of Credit

Once you build up equity in your home, you have the privilege of applying for a home equity line of credit, which lets you borrow the amount of money you need.

The majority of financial institutions (banks, savings and loans) have entered the home equity market.  As a result you have many options when you are shopping for the best loan. 

In fact, a home equity loan is a second mortgage on your home.  You generally get a line of credit up to 70% or 80% of the appraised value of your home, less whatever you still owe on your first mortgage. 

For instance, if your home is worth $200,000 and you owe $40,000 on your mortgage, you may receive a home equity line of credit for $120,000 since your lender would subtract your $40,000 owed on the first mortgage from your $160,000 worth of equity.   

You will qualify for a loan not only based on the value of your home but also on your creditworthiness.  For example you must show prove that you have a regular source of income to repay a home equity loan. 

The difference between the two types of credits is easy: the home equity loan has a fixed rate and the home equity line of credit has a rate that changes and it’s better indicate to consolidate other debts than the credit cards. 

The home equity line of credit is an "on demand" source of funds that you may access and pay back as needed. 

You only pay interest if you carry a balance since these line of credits are basically a revolving line of credit, similar to a credit card but with a much lower rate for the reason that the line of credit is secured by your home. 

Like other mortgages, the home equity loan will require you to go through an elaborate method to qualify for an open line of credit.  You generally will require a home appraisal and have to pay legal and application fees and closing costs. 

Because a home equity loan is backed by your home as collateral, it is considered more secure by lenders than unsecured debt, like in the case with credit card debt.  Further, since the loans are less risky for banks, you will benefit by getting a much lower interest rate than you would on credit cards or the majority of other type of loans. 

Home equity loans could as a result offer great rates when the prime interest rate is low, but subject you to much higher interest costs if the prime shoots up. 

You can tap the credit line just by writing a check, and you can pay back the loan as fast or as slow as you would like, provided that you meet the minimum payment every month.