Home Equity: Loan vs. Line of Credit
Although home equity loans and home equity lines of credit (HELOCs) offer higher borrowing limits than unsecured loans, there are some key differences that set each option apart.
What is a home equity loan?
Often called a second mortgage, your home secures a home equity loan, meaning the lender can seize the property if you fail to make repayments. The current annual percentage rate (APR) starts at about 3.25 percent and depends on the length of the loan.
What is a home equity line of credit (HELOC)?
Your home secures a home equity line of credit. A HELOC gives you access to a borrowing limit. You don’t pay interest or make payments until you use the funds. Like a credit card, you make payments on any amount to pay down the balance. Keep in mind that you’ll pay more in interest payments if you take longer to pay the balance.
Lump sum disbursement vs. withdrawals as needed
A key difference between a home equity loan and a HELOC is how you receive the funds. A home equity loan is given as a lump sum, meaning the entire amount may be deposited into a specified account. Repayments range from five to 20 years.
With a HELOC, you can withdraw the money from the approved credit limits as you need them via a specific account or checks to advance funds. There is also 25-year term (10-year draw period, and 15-year repayment period).
Fixed vs. variable interest rate
Interest charges for a home equity loan are at a fixed rate, while most home equity lines of credit are at a variable rate.
Fixed rates allow your lender to provide you a schedule for stable repayment amounts. However, variable rates are based on interest rates on a standard index, or prime rate. These rates fluctuate based on U.S. economy factors. HELOCs interest rates will change only if the prime rate changes.
If you’re considering a home equity loan or line of credit from Adirondack Bank, contact a Branch Banking Representative for more details.
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