Home Equity Loans and Home Equity Lines of Credit Definitions

There are two primary types of home equity products available on the market today: Home Equity Loans and Home Equity Lines of Credit. Each product offers its own unique advantages and disadvantages.

With a Home Equity Loan you gain the advantage of a fixed rate for between 5 and 30 years and it simulates a first mortgage, only in second lien position on the house. In addition, home equity loans require that all of the cash is taken at closing and is paid back over time just like a first mortgage. You do not have the ability to draw back up on a loan once it is paid down.

Home Equity Lines of Credit offer a variable rate line of credit where the rate is usually tied into the prime rate of the bank. The required payment each month is generally only the interest on the outstanding principal of the line. Home equity lines of credit offer the advantage of keeping your payments lower and putting the principal reduction of the loan in your hands. Another advantage of the home equity line of credit is that once you pay down the line you can access the money again in the future by writing checks with a checkbook that is provided by your bank. The slight disadvantage over a home equity loan is the variable rate.