Home Equity Loan

What are home equity loans and HELOCs?

A home equity loan (HEL) allows you to borrow against a portion of your home’s equity. Your lender provides the equity — the difference between what you owe on your mortgage and your home’s market value — in a lump sum.

A home equity line of credit (HELOC), on the other hand, is a revolving line of credit you can draw on when needed, during the preset draw period.

Home equity interest rates
Interest rates on HELs and HELOCs are typically higher than traditional mortgage rates because they are types of second mortgages, which take second position behind your original home loan. If you lose your home to foreclosure after defaulting on your loans, your original (first) mortgage lender would be repaid before your home equity lender.

If local home values drop, you might not have enough equity to pay off both your first and second mortgage if you have to sell your home. Or, if you fall on hard times, you might have to prioritize making payments on your first mortgage, leaving you behind on your second. Lenders consider these extra risks when offering home equity loan rates.

The rates and ranges in the table assume a $25,000 home equity loan or HELOC on a property with an 80% LTV ratio.

How does a home equity loan work?

Home equity loans allow homeowners to access their equity in a lump sum. Lenders often issue them as fixed-rate loans with five- to 30-year repayment terms. Let’s say your home is worth $250,000 and your mortgage balance is $150,000. In this case, you’d have $100,000 in equity. However, you’re typically limited to borrowing 85% of your home’s value, minus what’s owed on your first mortgage, when taking out a HEL or HELOC. In this example, you may qualify to borrow up to $62,500. Home equity loans are repaid in monthly installments, just like the first mortgage on your home. If you’re still repaying your first mortgage and decide to borrow a HEL, you’d be responsible for both mortgage payments each month until they’re paid in full.

Home equity loan vs. HELOC

A HEL is provided in a lump sum and immediately repaid in monthly installments, while a HELOC is a revolving line of credit that works similarly to a credit card. Your lender approves you for a certain amount that you can spend as needed. You make payments on what you borrow rather than the total credit line. HELOCs often have a 10-year draw period, during which you can borrow from the available credit line and pay interest only on the balance used. After the draw period ends, you’ll enter the repayment period, when you’ll pay off the remaining balance. HELOCs usually come with variable interest rates, though some lenders do offer fixed-rate HELOC options. HELs tend to have fixed interest rates.
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