Differences Between a Home Equity Line and Loan

Author: Ari Socolow on January 30, 2011

There are basically two types of home equity loans: a home equity loan (HEL) or a home equity line of credit (HELOC).

There are basically two types of home equity loans: a home equity loan (HEL) or a home equity line of credit (HELOC). Since the debt is secured by your home, the interest rate is typically less than that of a credit card or personal loan. Also, the interest paid on the loan may be tax deductible. (Always check with your tax or financial advisor before making any tax-related decisions).

Home Equity Loan (HEL)

A home equity loan, also referred to as a second mortgage, is best used in situations where you intend to use the funds for a specific purpose, like home improvements or a car purchase. The interest rate and the monthly payments are fixed. These get paid back in installments over a fixed period of time, typically 5-15 years. While the time to repay a loan is shorter than that of a traditional mortgage, borrowers like the certainty of having a fixed rate and fixed monthly payments.

Home Equity Line of Credit (HELOC)

A home equity line of credit is a revolving line of credit that allows you to access the funds as you need, instead of all at once. The interest rate is variable and in most cases tied to prime. The rate for which you qualify is usually based on your creditworthiness and your ability to repay the loan.

Advantages and disadvantages of using each type of loan

Knowing when to use which type of loan depends on your specific circumstances. If you have a long term remodeling project which requires cash installments over time, then a line of credit makes sense. If your home needs a major upgrade and you are making one large payment, then the stability of a home equity loan may be a better choice.

Advantages of HELs and HELOC

HEL (Home Equity Loan)	HELOC (Home Equity Line of Credit
Fixed interest rate. Although you pay interest on the entire borrowed amount, your rate is locked in if rates swing upward.	Variable interest rate. You pay interest on the amount you access from your line of credit, rather than the entire loan amount.
Attractive interest rates (lower than credit cards or personal loans).	Attractive interest rates (lower than credit cards or personal loans).
Loan interest may be tax-deductible.	Loan interest may be tax-deductible.
There is one lump sum of money borrowed.	Access to money as you need it.
Set monthly payments make it easier to estimate your expenses.	As you borrow more, the minimum repayment will increase. However, interest-only repayment options are available.
Can link into a relationship banking product to receive rate discounts, free services, or added benefits.	Can link into a relationship banking product to receive rate discounts, free services, or added benefits.

Disadvantages of HELs and HELOCs

HEL (Home Equity Loan)	HELOC (Home Equity Line of Credit
Required to borrow the entire amount upfront whether used or not.	Knowing money is available at any time can be tempting.
Fixed payments can take up to 15 years to repay	Variable interest rate could adjust upward.
There are usually fees that add costs to the loan amount.	There are usually fees that add costs to the loan amount.
Repayment of interest and principal begins as soon as you receive the money.	Interest-only repayment options are available from most lenders.
If you cannot repay or refinance the loan, then you may be forced to sell or lose your home.	If you cannot repay or refinance the loan, then you may be forced to sell or lose your home.

While the advantages for both types of loans may sound appealing, carefully evaluate whether the benefits each has to offer is worth incurring the additional debt. Compare home equity rates.

Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to bank transparency and the climate crisis. Since co-founding BestCashCow in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

Comments

Jonetta

January 12, 2011

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Is this review helpful? Yes:6 / No: 4
jamie

August 17, 2013

Many homeowners like a fixed rate home equity loan, especially when rates are low, because they can plan their budgets better and not be surprised by higher payments due to their loan adjusting upward.

Is this review helpful? Yes:7 / No: 3

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New Savings and CD Rates

Featured - Home Equity Line Of Credit Rates 2024

Lender	APR (%)^?	Monthly Payment^?	Learn More
Third Federal Savings and Loan	Intro APR 7.240 % After Intro: 7.240 %	$0	Learn More More Info
Conditions… Variable APR of Prime minus 1.01% in all states. Min loan amount $10,000. Max loan amount $200,000. 30-year term. Annual fee waived for the first year. See conditions for guarantee at thirdfederal.com. Third Federal rate are typically 20% lower than other leaders Guaranteed Lowest Rate No closing costs, prepayment penalties, or minimum draw requirements 10 year draw period
Rate	Intro APR 7.900 % After Intro: 7.900 %	$25,000	Learn More More Info
A Guaranteed Rate HELOC is secured with your home as collateral, whereas personal loans and credit cards are not. To check the rates and terms you qualify for, we will conduct a soft credit pull that will not affect your credit score. However, if you continue and submit an application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit. Approval may be granted in five minutes but is ultimately subject to verification of income and employment, as well as verification that your property is in at least average condition with a property condition report. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing. Guaranteed Rate Home Equity Line is an open-end product where the full loan amount (minus lender, broker, third party, and governement fees, as applicable) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. Apply in 5 minutes, get your money in as fast as 5 days. Digital application experience. Funds directly to your bank account. No in-person appraisal needed.
Upstart	0.000 %	$0	Learn More More Info
1. APRs for initial advances range from 8.25% to 18.00% based on funded HELOCs as of September 2024. Your actual rate will depend on many factors such as your credit history, loan-to-value ratio, line amount, loan term, lien position, and property state. The lowest rates are only available to the most qualified applicants. The APR is variable, but the APR that will apply to each draw will be fixed on the date the draw is made. 2. As of October 2024, 10% of funded HELOCs achieved a closing timeline of 6 days or less and a funding timeline of 10 days or less. This timeline assumes consumers close with our remote online notary, provide supporting documentation promptly, and ensure the information provided is accurate and consistent with our verification process. Delays, discrepancies, and other unforeseen factors may impact the closing timeline. MBA’s 2024 Home Lending Study reports an average industry closing time of 31 days. 3. A Home Equity Line of Credit has a variable rate. The APR may change, but the APR that will apply to each draw will be fixed on the date the draw is made. Your APR will be the Prime Rate at the time of draw plus a margin fixed for the life of the HELOC. As low as 8.25% APR on your initial draw* Get your money up to 5x faster than the industry standard* Fixed rate on each draw* No paperwork needed to apply
Figure Home Equity Line	0.000 %	$0	Learn More More Info
The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. Fastest way to turn home equity into cash Flexible terms, redraw up to 100%, borrow $20k-$400k Approval in as little as 5 minutes. Funding in as few as 5 days. Use to consolidate debt or finance your next home project
AmeriSave Mortgage Corporation	0.000 %	$0	Learn More More Info
• Home Equity Loans & Refinance – Cash out • Customized rate quote with no impact to credit • Low Rates, Quick Approvals, Wide Range of Products • Over 100 Billion Funded. 22 Years in Business Home Equity Loans & Refinance – Cash out Customized rate quote with no impact to credit Low Rates, Quick Approvals, Wide Range of Products Over 100 Billion Funded. 22 Years in Business
New American Funding, LLC	0.000 %	$0	Learn More More Info
Cash-Out and Home Equity Options Available. Home Improvement, Buy a Vacation Home 303k+ positive reviews, A rating from the BBB Pay off higher interest rate credit cards, Pay college tuition 100% online mortgage application available
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HELOC, HELOAN or CASHOUT REFI all available. No Lender Fees Fast Easy Over 20 Years Experience