Comparison: Home Equity Loan vs Home Equity Line of Credit HELOC

 

We have talked about home equity loan and home equity Line of Credit or HELOC in the past. But can you please quickly summarize these for me?

Both home equity loan and home equity Line of Credit let you borrow against your home equity. Both could give you access to a large amount of money, usually at a low interest rate. And both are easy to qualify for, since they are secured or backed by your home.

Well, both home equity loan and home equity Line of Credit sound awesome!

Well, it’s not all sunshine and rainbows.

Both make it very tempting to borrow against your home equity and use the money for short-term expenses like taking a vacation or buying a car, which is not good for building your wealth and net worth.

And with both these, the bank can foreclose the loan and sell your house to recover its money if you are unable to repay for any reason, because your home is used as the collateral.

Wow, that’s scary. But they still sound extremely similar. Are there any differences between home equity loan and home equity Line of Credit?

Of course there are differences!

With a home equity loan, you get large lump-sum money up front for your use. But with a HELOC, you can borrow any amount up to a certain limit as and when you need it.

A home equity loan usually has a fixed rate of interest, whereas a home equity Line of Credit usually has a floating or variable interest rate.

HELOCs typically require a higher credit score to qualify for than home equity loans.

While home equity loans have closing costs and points just like mortgages, HELOCs generally do not have these.

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