HOME EQUITY LOANS

Home equity lines of credit (HELOCs) and home equity loans are similar methods of borrowing money via the equity in your home. A HELOC is a line of credit with a variable interest rate, while a home equity loan is a lump sum paid back in fixed installments. Both typically allow you to borrow up to 85 percent of the value of your home minus your outstanding mortgage balance.

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TYPES OF HOME EQUITY LOANS

  • A home equity loan is a secured loan that allows you to borrow a set amount against your equity at a fixed interest rate and repayment term, usually up to 30 years. The interest rate depends on your credit score, payment history, loan amount and income.

    How you use home equity loan money is up to you. Some use it to pay for major repairs or renovations, like adding an addition, gutting and remodeling a kitchen or updating a bathroom. Some take out a home equity loan at a lower, fixed-rate to pay off high-interest credit card debt.

  • A home equity line of credit, or HELOC, is a credit line tied to the level of equity in your home. Unlike a home equity loan, a HELOC has a variable interest rate, which means the rate can increase or decrease, along with your monthly payments, at preset times. Some HELOCs come with low introductory rates for a period of time (for example, six months), then flip to a higher, but still variable, rate.

    A HELOC is a revolving line — you can use the funds, repay them, then borrow them again, much like a credit card. You’ll only be able to use the funds during the draw period, however, typically 10 years. During this time, you might only need to make interest payments. When the draw period ends, you’ll have a certain amount of time to repay what you borrowed plus any interest, usually up to 20 years.