What is the difference between a HELOC and a Home Equity loan?

First, here are some basic similarities:

  1. Both a HELOC (Home Equity Line Of Credit) and a home equity loan borrow money against the equity you have built up in your home.
  2. Both require a credit check and home appraisal.
  3. Both must be repaid within a set time period, and both accrue interest.

The primary difference is that a HELOC is just that, a line of credit that you can draw from, much like a standard credit card. Some lenders will charge an annual fee for having an open, unused line of credit, but most simply charge as you spend the money. Your monthly payments will fluctuate as you draw out more money or pay down the balance. Keep that in mind and make sure you don't get in over your head.

In comparison, a home equity loan is released in one lump sum, similar to a second mortgage. Interest rates and fees for home equity loans are typically relatively low, which makes this a popular way for people to finance home repairs or upgrades, pay the kids' college tuition, or pay off medical expenses.

The primary risk you take with either of these is that if you can't make the payments, your home could be at risk. We recommend that before you sign any papers, you re-structure your current budget to include the extra payment. Make sure you can afford the additional expense before you jump in.