Difference between Home Equity Loan and Line Of Credit
A home equity loan can be a helpful financial tool for any homeowner, although a line of credit can be quite useful as well. Both are routinely used to gain financial leverage by way of equity built up in the home, as in the case of the appropriately named home equity loan, and with the market value of the home as in the case of line of credit. Let's take a closer look at both financing options.
Definition
A HEL or home equity loan is a type of loan in which the equity that the borrower has built up in his or her home is used as collateral. The proceeds from the loan are typically used to pay for home repairs, costs of medical treatment or to pay for college. With a home equity loan, the arrangement causes a reduction in the equity of the home.
A line of credit is a source of credit available to individuals, business organizations and even to government organizations. Such loans are typically provided by banks and other financial institutions. Lines of credit may come in several types, among them overdraft protection, demand loan, export packing credit, term loan, discounting, purchase of commercial bills, and a few others. It would be helpful to think of lines of credit as bank accounts that borrowers can draw funds from at their discretion. As for the interest, it is only paid upon withdrawal of the money. Lines of credit can either be secured by collateral or they may be unsecured.
What You Get
When you apply for a home equity loan, you can get as much as 100% of your home’s equity. This is equivalent to the current market value of your home, after the first mortgage and other obligations are deducted. There are however home equity loan arrangements that give you as much as 125% of your home’s value.
With a line of credit arrangement, you can get a credit limit of up to 100% of your home’s value. As with a home equity loan, you may also be able to borrow as much as 125% of your home’s value.
Cost
Both home equity loans and lines of credit typically come with higher interest rates than first mortgages. With a home equity loan, you have the option to choose from an adjustable rate that changes according to fluctuations in the prime rate, or a fixed rate of interest. In addition, you will also have closing costs to consider.
A line of credit usually comes with a lower initial interest rate than a home equity loan, although this arrangement usually comes with more risk on the interest rate, since the rate changes according to the prime rate. Lines of credit also do not usually involve closing costs.
Similarities and Differences
Home equity loan
- A type of loan in which the equity that the borrower has built up in his or her home is used as collateral
- You can get as much as 100% of your home’s equity
Line of credit
- A source of credit available to individuals, business organizations and even to government organizations
- You can get a credit limit of up to 100% of your home’s value
