Many homeowners think of home equity loans and home equity lines of credit as the same thing. But they’re not. In fact, there are some significant differences between the two.
Think of a home equity line of credit as a type of credit card that uses your home as collateral. You can borrow up to a certain amount of money based on the amount of equity you have in your home. A home equity loan, though, provides you with a single lump sum of cash, again based on the amount of equity in your residence.
Say you have $100,000 worth of equity built up in your home. Your lender might approve you for a home equity loan of $60,000. You’d then receive that amount in one lump sum. You’d pay your loan back in monthly installments – with interest – just as you do with your primary mortgage loan.
You can use the money from a home equity loan for anything. Some use it to pay for second-floor additions or a new master bedroom. Others might use it to pay off high-interest-rate credit-card debt or help fund their children’s college educations.
A home equity loan generally makes more sense than a home equity line of credit when you want to use a large pile of money for a specific purpose. If you just want money available in case you need it for emergencies or other costs, a home equity line of credit might be the better choice.
To apply for a home equity loan, call several lenders to see which one will offer you the lowest fees and interest rates. Applying for such a loan is similar to applying for a standard mortgage loan. You’ll need solid credit and you’ll need to prove to your lender that you can afford the monthly payments that come with your home equity loan.