Home Equity Loan vs Equity Line of Credit

Personal Finance

Home Equity Loans vs. Home Equity Lines of Credit

What's the difference?

Home equity loans and lines of credit, also often called second mortgages, are used for a variety of financial needs, but they are distinctly different financial tools. Eugene Lucci, Director of Product Management at FirstMerit, discusses the differences and how both can be used for personal and business needs.

A home equity loan is the more traditional option for homeowners who have one-time borrowing needs and prefer the security of a fixed interest rate and fixed monthly payment, Lucci says.

“Usually, a home equity loan is used for a single, specific use that the borrower has, such as remodeling a kitchen,” he says. “The borrower normally knows how much they’ll need, how long they’ll take to pay it back and how much of a monthly payment they can afford.”

With a home equity loan, borrowers receive the loan at one time in a lump sum. They make fixed payments of the principal and interest. Loan terms usually vary from five to 30 years, depending on the loan amount and the borrower’s choice. Amounts generally range from $10,000 to $500,000. The borrower can borrow between 80 and 100 percent of the home’s equity, determined by subtracting the existing mortgage balance from the home’s market value.

Home equity line of credit

A home equity line of credit (HELOC) is a form of revolving credit, much like a credit card, Lucci explains. These lines of credit are generally used by those who want a more flexible use of the money now and in the future. HELOCs also provide a lower interest rate than many other types of consumer credit, and borrowers can select a monthly payment that best fits their budget.

“People generally use home equity lines of credit for shorter-term expenses, like vacations, medical bills or tuition payments,” Lucci says. “It’s there if you need it, and you can draw on it anytime you want.”

There are various ways to access your HELOC, depending on the financial institution. With a FirstMerit HELOC, for example, borrowers can access their credit line using their FirstMerit Home Equity MasterCard, checks or online banking. As the borrower makes payments, the credit line is restored accordingly—just like a consumer credit card.

Businesses, HELOCs and equity loans

Business owners can also use a home equity loan or line of credit to fund their business, Lucci says. These loans or lines of credit can mean access to a low interest rate funding option.

“One of my friends who has a small business took out a home equity line of credit and uses it for his business’ capital needs,” he says. “Home equity lines of credit or loans are great for the business owner who might need to pay for a capital expense right away and then can turn around and pay the line off later.”

For more information on home equity lines of credit or home equity loans, contact Eugene Lucci, Director of Product Management at FirstMerit, at product.management@firstmerit.com.

All loans subject to credit approval.

Home Equity Loan Vs. Home Equity Line Of Credit

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