Explaining home equity loans and lines of credit

On Behalf of | Aug 31, 2023 | real estate banking & finance | 0 comments

As you look to finance a mortgage for a house, using the property as collateral is not your only option. Some houses build up significant equity. When it comes to tapping into the value of your residence, home equity loans and home equity lines of credit are two common options.

While both choices allow you to access funds based on the equity in your home, each option has distinct characteristics and serves particular financial needs.

Home equity loans

Sometimes referred to as a second mortgage, a home equity loan is a fixed-term loan that allows homeowners to borrow a lump sum using the equity in their home as collateral. Property owners generally utilize these loans to consolidate debt and fund a major renovation project.

You repay the loan over a specific period, usually with a fixed interest rate. Bear in mind that your lender will likely want a look at your income, liabilities and credit score before approving you.


Unlike a home equity loan, a HELOC does not provide a lump sum payment. Instead, a bank will give you a line of credit that lasts for a specified period. You can spend up to the maximum amount or pay some of the money down before spending additional money.

Additionally, a HELOC is typically a variable-rate loan. Since the interest rate will not be set in stone, you could end up with higher rates during the loan period.

Consider options accordingly

According to Bankrate, a 2023 CoreLogic survey found that an average homeowner in the United States has more than $274,000 in equity. This makes home equity loans and HELOCs workable options for many property owners, but choosing the right financing method depends on your priorities and circumstances.

If you require funding for a one-time expense, a home equity loan might be more suitable. Conversely, a HELOC could be the better choice if you need continual access to funds and can handle varying payments.

Carefully reviewing the terms, interest rates and repayment schedules of both options will help you make an informed decision.