....... offer both kinds. A home equity loan for
$10,000 and a home equity line of credit for $10,000
are two completely different animals though they
have a lot of similar features.
Home Equity Line of
Credit Loan
If you apply for and
are granted a home equity loan for $10,000 at 7% APR
for 15 years, you will receive a check or a deposit
to your bank account of $10,000. That is the full
amount of the loan that you can ever draw on that
particular application. Depending on the terms
agreed upon, you may have one to several months
before you have to begin repaying the loan. You'll
pay a fixed amount every month until the full amount
of the loan and the interest charge is paid off.
You'll know from the very start how much you'll be
repaying.
Home Equity Loan - Line of
Credit
A home equity line of
credit - a HELOC - is much more like a credit card.
When you apply for and are granted a home equity
line of credit, the bank establishes a 'line of
credit' - which functions just the way that a
'credit limit' does on your credit card. You may
receive special checks or a plastic card with which
to access your line of credit - but you don't
receive the full amount at one time.
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In fact, you don't have
to take any of it immediately. You can draw on the
line of credit at any time, up to the full amount of
the line of credit throughout the agreed-upon life
of the loan. Suppose that you're doing some home
repairs. You can use your home equity line of credit
to pay for $2,000 worth of roofing tiles. That
leaves you $8,000 in your line of credit. Three
weeks later, you can use your line of credit to pay
for $4,500 worth of windows - and still have $3,500
left that you can borrow against.
If you then start
paying back on your home equity line of credit, that
money becomes available to you again. If you pay
back $1,000 of what you've borrowed, you now have
$4,500 on your line of credit.
A home equity line of
credit has two 'phases' - there is the draw period,
during which time you can draw against the credit
limit as long as you stay below the limit. During
that time, you can elect to only pay the interest
that accrues - or you can make payments on the
principal to free it up. Once the draw period is
over, you go into the repayment period. During the
repayment period, you can't draw against the line of
credit any longer, and must make full repayment.
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