The Difference Between a Home Equity Loan and a Home Equity Line of Credit

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If you want to make some essential home improvements or simply need cash to pay bills, you may be looking at your home's equity as a source of funding. There are two ways you can use it: through a loan or via a line of credit. Here are the differences between each. First, home equity is the value of your home minus any outstanding mortgage balance.  You can use that equity to secure a loan. Because a home equity is loan is secured by your residence, you're able to get lower interest rates than, say, a loan with no collateral as security, as well as a possible tax benefit.

Home Equity Loans

Also called a second mortgage, a home equity loan lets you borrow one time at a fixed rate and pay fixed monthly or bi-weekly payments. You would use this option if you're looking for a one-time sum of money, perhaps for debt consolidation or a single home renovation project, such as the building of an addition or an extensive kitchen/bath remodel.

A home equity loan has an initial disbursement at closing, requires principal & interest payments to be repaid over a fixed period (typically ranging from five to 20 years), and usually has a fixed rate for the entire term. 

Home Equity Line of Credit

Commonly known as a HELOC, a home equity line of credit allows you to access cash when you have need for it.  These loans typically come with a variable rate.  As you pay down the principal with monthly payments, those funds become available again.  HELOCs are a good choice  if you need money spread out over intervals for things like medical bills, college tuition, or home improvements that you intend to do in stages.

A HELOC has a set credit limit from which you can access your funds at any time during the initial ten year disbursement period. It has interest-only payments during the disbursement period, switches to principal & interest payments for the repayment period (usually 20 years), and comes with a variable interest rate, which fluctuates depending on changes in a reference rate, such as the Wall Street Journal Prime Rate.

Get the Best of Both

Our flexible 3-in-1 Advantage Plan puts you in control of a home equity plan that can change as often as your needs. It offers a credit line, fixed rate advances, and a credit card – all in one plan. Learn more at

Now that you know the difference between a home equity loan and a HELOC, you can learn more about home equity by downloading our free Equity Edge eBook.  This eBook will introduce you to current remodeling trends, affordability, and includes tip sheets on going green and quick home improvement projects to spruce up your home in a pinch.


Use Home Equity Wisely

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About Author

Bill Burpeau
Bill Burpeau

Bill Burpeau is a relationship manager at Hanscom FCU. As a Credit Union Certified Financial Counselor, he is an enthusiastic advocate of financial literacy and education. He constantly studies and is up to date with the latest financial management concepts and technology. Bill is a graduate of Texas A&M University with a BBA in Business Management and served in the U.S. Navy as a Supply Officer.

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