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Home Equity Loan vs. Home Equity Line of Credit | The First National Bank Blog

April 28th, 2015

HEL vs. HELOCHow does a home equity loan differ from a home equity line of credit?
Home equity loans and home equity lines of credit (HELOCs) are similar in that they both use your home as security. They differ in several other ways, however. Home equity loans are paid to the borrower in one lump sum, while lines of credit provide the homeowner with checks or online banking to withdraw funds as needed over time. Most HELOCs are available for up to 10 years. You can also pay down a HELOC and then borrow more from the line of credit. A home equity loan does not let you borrow additional funds from the loan; however, at The First, our equity loans do not have a penalty for early repayment.

Many people use home equity loans to cover major upgrades to their homes. A HELOC can be used for this purpose too, but it can also cover unexpected repairs, as well as expenses totally unrelated to home improvement such as education and medical bills.

Another major difference between a home equity loan and a HELOC is that home equity loans have a fixed interest rate, while the interest rate on a line of credit is usually based on the Prime Interest Rate. Because a fixed rate adds a measure of protection against interest rate fluctuations, a fixed rate will likely be initially higher than a variable one.

Paying the loan back
A home equity loan has a monthly payment schedule that begins when you take out the loan. Your principal and interest payments won’t change from month to month, and at The First, you can choose a payment schedule anywhere from 3 to 20 years. HELOC payments are usually made during the 10-year draw period and the amortized period starting after maturity. These payments include principal and interest, and you can pay the debt down early without incurring a penalty.

Despite their differences, home equity loans and home equity lines of credit do have one thing in common—both must be paid off when you sell your house.

Do you need help paying for a major expense or a long-term goal? Visit or for more information.

What do you feel is the best reason for borrowing against the equity in your home? Debt consolidation? Tuition costs? Tell us what you think in the Comment section.