Similar in style, many consumers are confused by the differences of a home equity loan (HEL) versus a home equity line of credit (HELOC). While both offer homeowners a chance to borrow against the equity in their home, they differ in various terms of the loan.
With an HEL, a homeowner can borrow equity (the value of the home minus any outstanding debt of the home) in one full and immediate lump sum. For example, John Homeowner has $50,000 of equity in his home. With an HEL, he may be able to borrow that money in one up-front transaction. Usually the lender requires an appraisal of the property and equity in the home of at least 20 percent. Interest rates may be variable or fixed.
An HELOC also allows homeowners to borrow against their equity; however, the amount borrowed is revolving, not a fixed amount. For example, John Homeowner may need to borrow only $10,000 of equity right now, but estimates he’ll need the same next year. With an HELOC, John can make withdrawals as needed. Interest rates on HELOCs are usually the prime rate plus a margin, so they will fluctuate over the life of the loan.