Seven Home Equity Tips, Part 3: Learn About Home Equity Loans and HELOCs

By Flexo on Thursday, August 16th, 2007

If you’re going to borrow against your home equity, you might want to understand the different options are available. David Bach in a recent column outlined the differences between home equity loans and lines of credit.

Home Equity Loans. Generally called a second mortgage, this type of loan allows you to borrow a set amount that you receive in a lump sum up front. You pay it back over a specified period (typically 10 or 15 years) in monthly repayments. The interest rate is usually higher than a first mortgage but lower than most credit cards, and fixed for the life of the loan.

HELOC. This stands for “home equity line of credit,” and generally works like a credit card. Your lender assigns you a maximum amount up to which you can borrow. You can use only what you need if and when you need it, up to the limit. Interest is typically variable, but usually lower than credit cards because the credit is secured by your home.

There are slight but important differences between the two types of products, and different lenders will throw in additional twists and turns.