Home Equity Loan vs. Line of Credit

Explore the differences between a home equity loan and line of credit

Both a home equity loan and a home equity line of credit use your home as collateral. So how do they compare when it comes to financing options? Explore these key points when choosing a home equity loan or line of credit.

Home equity loans

With a home equity loan your funds are disbursed in one lump sum on the fourth business day after you close on your loan. You make equal monthly payments of principal and interest to pay the loan back.

A home equity loan is basically like a fixed-rate mortgage. In fact, it's often referred to as a second mortgage, meaning that the home equity loan will be in second lien position after the first mortgage already on the property. Home equity loans can also be in the first lien position if you have paid off your mortgage and have no other loans, lines or liens on your property or intend to pay off any existing mortgages, loans or lines with this new loan.

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Home equity lines of credit

A home equity line of credit or HELOC is a bit more flexible in terms of accessing your funds. You can access your home equity line of credit as you need it. That means you can borrow many small increments, a few large increments or whatever suits your needs, as long as you have the funds available.

Each time you borrow from your line of credit, it's called a "draw". You draw funds by writing a check or using online banking. During the first 10 years that your line is open, you may draw on that line whenever you need to and you will make a monthly interest only payment on the portion of the line of credit you use. That interest is charged at an adjustable rate based on the Prime Rate In this instance, a lien is a binding agreement between a lender and a borrower that gives the lender a right to the property, which is being used to secure the loan. If a loan is in first lien or first position that means there are no other mortgages, loans or liens on the property or that the borrower will be paying off all existing mortgages or loans with this new loan that would move into the first position. plus or minus a margin.

With a HELOC you can repay principal at any time during the draw period. You can continue to use available funds or repay principal for the funds you have already used, so you can re-borrow it again with another draw during the draw period.

After the 10 year draw period, you will enter into the 15 year repayment period in which you will have a minimum monthly payment amount of both principal and interest to pay off the outstanding balance of your line of credit.


Get help choosing between a home equity loan or line of credit

For more information or to speak with someone about applying for a home equity loan or line of credit, call a Home Loan Originator at 1-888-333-1206.