Both HELOC and home equity loan are entirely determined by the equity that you have in your home. The HELOC works like a revolving line of credit and it has an interest rate, which is variable. In other words, the interest rate is based on the going rate in the market at any given time. The market dictates your interest rate and so it could be high or low.
Personal Loan and Line of Credit
The home equity loan is more like having a personal loan where you obtain a percentage in one lump sum. The terms of paying back the loan could start from a five year term to a thirty year term. Most people use home equity loans for a one time large expense. The loan’s interest rate is usually fixed. Most home equity loans carry closing costs while HELOCs do not.
The Interest Rate
If your home equity loan has a fixed interest rate, you are required to have a recurring monthly payment schedule. In so doing, you will be able to tell the precise amount that your monthly payments will be throughout the entirety of the loan. In comparison, the HELOC gives you more flexibility so you pay the interest only while going through the disbursement period.
Second Mortgage
The home equity loan is considered a second mortgage; giving you access to your money all at once. The HELOC is also connected to your mortgage loan as a second mortgage. In the case of the HELOC, you have to get an appraisal done and the line of credit will be based on the appraisal amount minus the original mortgage loan amount. Both HELOC and home equity loans can be used for home improvement or other large expenses. The HELOC has two payment periods; one is the disbursement of the line of credit where it can be actively used and the period where the principal payment is due. You can keep using the line of credit during its disbursement period as long as there is a balance available. However, that is not the case with the home equity loan.
