A home equity loan (HEL) is a type of loan in which the borrower puts up their home’s equity as collateral. The home’s equity acts as a sort of security deposit to decrease the lender’s risk. To obtain a home equity loan, borrowers typically must have a good to excellent credit rating.

The loan itself comes in the form of a single lump-sum loan that is paid off over time, generally at a fixed interest rate. Payments on the home equity loan include the actual loan funds, interest, and other fees. Additional fees include appraisal fees, originator fees, title fees, stamp duties, arrangement fees, closing fees, early pay-off, and so on. The majority of home equity loans require paying fees of some sort, so be sure you clearly understand the fees associated with your loan. It may be beneficial to get multiple quotes from banks to ensure you are getting the best rate.

Home equity line of credit

A home equity line of credit (HELOC) differs from a home equity loan primarily because the funds are not offered in a single lump-sum. Home equity lines of credit give the borrower a set limit on the amount of funds they can borrow, almost like a credit card. The lender sets the limit and the borrower can choose how much they would actually like to borrow. One of the chief benefits of a home equity line of credit is that the borrower only has to pay interest on the funds they actually use.

Payments fluctuate based on the amount of money borrowed and are subject to varying interest rates. Often, monthly payments may be interest only, although the borrower can choose to pay more to reduce interest charges.

The lender and borrower negotiate a “draw period” at closing. During the draw period, ranging between 5 and 25 years, the borrower can borrow funds and make payments while the lender charges interest. At the end of the draw period, the appreciated loan amount is due and can be paid off in a single payment or according to a loan amortization schedule.