Helocs Vs. Home Equity Loans: Differences That Matter

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Helocs Vs. Home Equity Loans: Differences That Matter

29 July 2017
 Categories: Finance & Money, Blog


If you are looking to put the equity in your home to good use, you may be offered a HELOC (home equity line of credit). You can also take out a home equity loan. Wait- are the not the same thing? Actually, no, these two equity-related financial products are not the same. Here are the differences, and why it matters:

HELOCs

A HELOC is like using your home equity like a revolving credit card. You start the line of credit, make a purchase, pay it down or pay it off, and then make other purchases. A HELOC does not close when you pay it off. It remains open until you request that the lender or creditor close it. You also have to make this request in writing.

Generally, it is a good idea to apply for a HELOC with the same lender or bank that holds your mortgage. This prevents you from getting into any financial trouble when your mortgage lender discovers that you have a second lien on your home for the HELOC. It also helps you make timely payments on both the mortgage and the HELOC.

Home Equity Loan

On the other hand, you have home equity loans. These are loans, which means that once you pay it off, the account is closed. It is based and granted only on the amount of equity you have in your home versus the larger amount of credit you receive from a HELOC. Many people prefer the loan to a HELOC since they know there is an end to the payments.

The loan will have a very specific rate of interest attached to it. For the duration of the loan, you know exactly how much you will pay in interest over the terms of the loan. These features also make it more appealing to homeowners because there are no fluctuations in interest or payments. They know exactly when the loan period will close. There is no way to borrow more money or buy more stuff with an equity loan. What you see is what you get.

The Big Benefit of a HELOC

Rather than take out two to twelve credit cards with high interest rates that will get you in trouble, the HELOC is more than enough credit for you. Most HELOCs are offered at much lower interest rates than credit cards and offer much higher credit limits than three to twelve credit cards combined. That means you will never have to file for bankruptcy to end the revolving credit hassle of several credit cards. Your HELOC is your main credit "card" for what you need.