Q:

What is the difference between home equity lines of credit and home equity loans?

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Quick Answer

A home equity line of credit is a revolving debt, similar to credit cards, while a home equity loan provides a one-time distribution of funds, states Bankrate. Both types of debt are secured by a home, meaning the lender may sell the home to recover losses following a default.

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What is the difference between home equity lines of credit and home equity loans?
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Full Answer

With home equity loans, borrowers must make regular payments over the course of the repayment period after receiving the one-time payment, according to LendingTree. Most commonly, the borrower must repay a home equity loan over 15 years. With a home equity line of credit, often abbreviated as HELOC, the lender approves the homeowner to borrow funds up to a certain amount, and the borrower draws funds at his discretion.

The draw period of a HELOC is the time in which the borrower may receive funds up to his limit. This period is usually 10 years, according to Bank of America. Minimum payments are required during this period if the borrower draws funds. After the draw period, a repayment period, typically consisting of 15 years, begins, and the borrower must make regular payments on the remaining balance.

HELOCs and home equity loans both typically have interest rates higher than those of traditional mortgages, states LendingTree. Both also typically require the buyer to pay closing costs, though these costs are often lower with HELOCs.

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