People who own homes sometimes need money for those things that life throws your way. The good news is that homeowners can tap into the equity of their home to get the money they need.

There are two main ways to do this - home equity loans and home equity lines of credit, or HELOC.

Home equity loans and home equity lines of credit have some things in common. However, there are some differences you should understand. By knowing both you'll be better prepared to make the right decision for you.

What Do Home Equity Loans and Lines of Credit have in Common?

Both loans and lines of credit are considered second mortgages. In addition, both the home equity loan and the line of credit are secured by your property. Generally speaking, both home equity loans and HELOCs have shorter terms - usually 5 to 15 years. First mortgages tend to be 15 or 30 year terms.

Now that we understand what home equity loans and lines of credit have in common, let's see how they are different.

How Are Home Equity Loans and Lines of Credit Different?

How Does a Home Equity Loan Work?

Of the two ways to use your home's equity, the home equity loan is more straight-forward. It's very similar to how a mortgage or other traditional loan works and typically there are no special features like interest only payments.

The home equity loan is a loan for a set lump sum of money to be paid out over a determined time. This means there is a fixed interest rate, and the payments are the same each month. Because home equity loans are structured in this manner over a specific time period, they're often referred to as term loans. After applying for your home equity loan, getting approved, and receiving the money, you can no longer borrow more.

How Does a Home Equity Line of Credit Work?

The thing that sets a home equity line of credit apart from a home equity loan is its flexibility. It's a flexible option based on how the lines of credit are structured and how you can access your cash. Instead of receiving one lump sum, you have access to a reserved amount of money over a given period. You can take as little or as much as you need depending on your circumstances. For many, this is a more convenient way to use their home's equity and better suits their needs.

Let's say you have a line of credit for $15,000. You then take $5,000 from the line of credit. Then you pay back $2,000. You will owe $3,000 against your line of credit with $12,000 available to you as needed down the road.

In a way, it kind of works like a credit card only you are using the equity in your home. However, with a home equity line of credit it's generally a lower interest than a credit card.

A Better Understanding Makes For Better Decisions

Now that you understand the basics of home equity loans and lines of credits, you can make a more informed decision. Knowing how each works can help you decide what is better for your specific financial needs.

If you want to know more about home equity loans or lines of credit, contact our lending experts. We're happy to help.

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