The Two Basic Types of Home Equity Debt

For home owners looking to borrow against the equity in their home, there are two basic options. Home owners can obtain a Home Equity Line of Credit, sometimes abbreviated as HELOC, or a home equity loan, sometimes referred to as a second mortgage. Each option has advantages and should be considered carefully when you are choosing between them.

Home Equity Loans

Each of these types of credit tend to carry a higher interest rate than your original mortgage will, but will still tend to have more affordable rates than unsecured forms of debt, since using your home as collateral and that reduces the risk the to lender. Which of the two you decide to go with will be determined on what you need from the loan.

Home Equity Line of Credit

A home equity line of credit allows you to withdraw funds up to a certain limit, like a revolving credit line. The interest rate is usually variable and the amount of available credit is determined by your home value and the amount of equity paid into the principle balance. There may be a fixed term limit on the credit line. Once this limit has expired, you may be able to renew the line of credit or convert it to a fixed interest equity loan. The home equity line of credit is good for people with continuing cash needs for home improvement, tuition, or ongoing medical bills.

Home Equity Loan

A home equity loan is like a second mortgage; it has a fixed interest rate and provides a single lump sum with fixed payments. The principle is paid off over a specific period of time. This is best for situations where you have a single project, bill or other one time need for a large sum of money. The means by which the loan amount is determined is similar to that of the home equity loan and include the value of your home and the remaining balance on the principle of your mortgage.

The precise terms of each of these types of home equity credit will vary from lender to lender and may have more complex terms and conditions, but the basic elements are the same. Before making your decision, determine what you need the loan or line of credit for, how it will be spent and repaid, then contact lenders, you can use the form on this site and lenders will be in contact with you. If you know you will only need a single lump sum payment, then a home equity loan may be right for your needs. However, if you know or think you might have a continuing need for cash for home improvement or other ongoing expenses then a home equity line of credit will be more suitable for your needs. Also be sure to look at the effects of a poor credit rating when dealing with home equity loans.