Home Equity:

Most borrowers looking for a second mortgage establish one of two types of credit lines that are attached to a home. These are commonly known as home equity lines of credit (HELOCs) or an equity loan. There are some differences between these types of loans so it is important to understand the differences before deciding which one is the most beneficial for your personal financial situation.

HELOCs

HELOCs are revolving lines of credit that work very similarly to a credit card. The line of credit is open for use at any time. When the line is used, the borrower is responsible for making payments based on the amount that has been used. When the line is paid down it is available to be used again. The main difference between a home equity line of credit and a credit card is that home equity lines of credit are usually fully tax deductible.

Equity Loan

Equity loans work more like a regular mortgage than they do like a credit card. A home equity loan allows borrowers to access the equity in their home like a home equity line of credit, but an equity loan requires that the borrower take the loan in a lump sum. This means that the borrower will begin paying interest on the total amount of the loan and not just on the amount that is actually used. Another difference between a home equity line of credit and an equity loan is that once the borrower pays down or pays off the equity loan it is usually not available for them to use again.

Further Comparison

Both types of second mortgage options usually have higher interest rates than first mortgages. HELOCs and equity loans usually have adjustable or variable rates as opposed to fixed rates. Some lenders, however, do offer equity loans at a fixed rate. These types of equity lines usually have closing costs associated with them, while the variable rate options typically have very little or no closing costs required.