What is the difference between home equity loan and line of credit?


There is almost no difference. These terms are so often used interchangeably that the difference between home equity loan and a line of credit has blurred significantly. The most obvious difference can be that a home equity loan HEL usually refers to a closed-end loan (that is, you get one big lump sum), while a home equity line of credit is used mostly as revolving credit and is an open-end HEL (home equity loan) - it can be used to draw all the amount at once, or you could draw whenever you need it.

A home equity loan is a second mortgage on the property allowing you to cash part of your equity and spend it on home rehabilitation, debt consolidation, education, or other. To better understand how a home equity loan works and whether there is difference between home equity loan and line of credit, you have to understand what equity is and how it is built.

Imagine you have bought a house worth $250,000, you put $30,000 down and took a $220,000 loan. Your equity is $30,000. Seven years later you will have paid, say, $20,000 of your loan principal. If houses in the area kept their price the same, your equity will be $50,000. If houses appreciated, your house may well be worth $350,000 after a new appraisal. In that case your equity will be $150,000.

Some lenders will allow a home equity loan or a home equity line of credit (HELOC) to reach around 80% of your equity; others will agree to extend you more money than your equity actually is. Anyways, a home equity loan, be it closed-end or open-end, is nothing more than a second mortgage used in a flexible way to finance your purchases.

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