What Is the Difference Between a Home Equity Loan & a Home Equity Line of Credit?

By Contributing Writer

  • Overview

    Home equity loans and lines of credit are similar in certain essential ways, but when used in conjunction with today's innovations in online banking, a line of credit offers several advantages. It's more flexible and more convenient to use than conventional home equity loans, and it continues to be remarkably easy to use for as long as you own your property.
  • Equity

    Whether you apply for a standard home equity loan or a line of credit, lenders will first determine what your property is worth and what you owe on it. If you owe more on the property than what it's worth, you don't have equity. But if your home is worth more than the amount owed, you have equity, and if your credit rating is good enough for the bank's requirements, you may be able to borrow money using that equity as collateral.
  • Terms and Conditions, Regular Loans

    Many banks and other lending institutions offer both lines of credit and straight-up loans on home equity. To make a regular loan, you and the bank work out the terms of it together. You negotiate to decide how much per month you will pay and how many months it will take to pay off the loan. The bank will charge you interest on the loan, of course, and then you will make the payments. On the day it is signed, both the banker and the borrower know when the loan is to be paid off.

  • Establishing a Line of Credit

    Lender and borrower will negotiate terms of a line of credit loan as well, but instead of specifying an amount for the loan, the bank establishes a maximum they will allow you to borrow based on the equity you own. You are then "pre-approved" to borrow funds up to that amount.
  • Flexibility

    In most cases, you will have to borrow a required minimum amount at first; $2,000, for example. After the line of credit is established, however, you're allowed to borrow according to your needs up to the allowed maximum and pay back funds on a flexible schedule, as long as you're certain to pay the minimum required each month. Banks usually require additional funds to be borrowed in minimum segments; of $100, for example. The amount of your minimum monthly payment will vary according to the amount you owe on the loan.
  • Convenience

    A line of credit loan is attractive to borrowers because of its flexibility. With modern electronic banking, customers are allowed to transfer funds back and forth among their checking, savings, lines of credit and other accounts. Most line of credit loans do not end at a prescribed time. They continue indefinitely, as long as you continue to hold equity, until they're paid off. Afterward, most banks will leave the line of credit open with a zero balance until you need funds again. More valuable information can be found at these websites: http://www.federalreserve.gov/Pubs/equity/equity_english.htm http://www.mortgageloan.com/home-equity-line-of-credit
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