Home Equity Loan (HEL) vs. Home Equity Line of Credit (HELOC)

When most people think of a loan, such as a second mortgage, they think of the benefits that comes along with it... as well as the risk involved. but most times, that risk is worth it, or it's simply a necessity. Your first son is off to college - and he didn't exactly get a scholarship. Or you need money for a car. There are options.

If you have a mortgage on your home, then you may have the opportunity to open what is called a Home Equity Line of Credit (HELOC) or to take out a Home Equity Loan (HEL) at 100% the value of your home (in some cases, as much as 125%). Which one is right for you? That depends on your needs.

A HELOC would be ideal for the individual trying to pay for his or her child's schooling, essentially this turns the value of your home into an actual line of credit. You have a 10 to 20 year period to draw upon it, after which you have a fixed period in which you are responsible for the outstanding balance, plus interest. Funds are drawn as you require them with special checks for the purpose. The minimum payment can be as little as interest only, each month and in some cases the interest may be tax-deductible. To qualify all you need is proof of income and home ownership. An appraisal is usually a requirement.

Or, if you need money right away - and want to avoid high monthly payments, then a HEL might be the best solution for you. This is different from an HELOC in that this loan takes the form of a single bulk payment. The term of the second mortgage can be anywhere between 1 and 30 years, which is repaid over a fixed period of time. Payments are made up of the principal and interest, which may also be tax deductible depending upon your situation.

Either way, the application process is simple  and can take something along the line of two weeks from beginning to end. Closing costs can vary. One benefit of going with a home equity line of credit is the less complicated process from most lenders. A lot of banks use your credit score, which they pay a credit bureau to acquire, or they'll use the "internal customer score" they have assigned to you. In some cases they may not even need to contact you.

Some expert preference is to advise a home equity loan over a home equity line of credit. This is in part due to the payments, which can possibly fluctuate in a HELOC. Some providers charge what an annual maintenance fee, which you might be familiar with if you use certain credit cards. And some borrowers might charge additional fees if the credit goes untouched for a long enough period of time. So, this isn't money you can sit on "just in case." Meanwhile a home equity loan's rate is fixed and you'll know from the time you sign what sort of payments you'll be responsible for.