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What's the difference between a HELOC and a Home Equity Loan?

HELOC (Home Equity Line of Credit) is an adjustable-rate mortgage, tied to the prime rate, a borrower takes out on their home and uses as a line of credit. It works like a credit card, with the ability to borrow money (against the equity in their home) at different points in time and only pay interest on what they use.

 

A Home Equity Loan (HELOAN) is a fully amortized fixed rate mortgage providing the borrower a lump-sum as opposed to a line of credit. If the borrower were to take $150,000 out of the equity of their home, they would receive one payment of $150,000 and begin to pay interest on the full amount immediately. Similar to a fixed rate agency loan, but in a second lien position. 

 

HELOCs and Home Equity Loans offer borrowers considerably lower interest rates than those of credit cards, and give the ability to tap home equity, without impacting a low rate first mortgage. That’s why many people opt to use these mortgages to consolidate their debt or make big purchases with lower interest rates!

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Which option is right for your borrowers?

Consider a HELOC:

- For those who want better cashflow with an I/O option.

- For those who need periodic access to cash/flexibility.

- For those who want to see large payments on the outstanding balance and see a corresponding payment reduction.

 

Consider a HELOAN: 

- For those who are concerned about fluctuating interest rates.

- For those on fixed income and need stable payments.

- For those who have an immediate need for cash.