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A home equity loan is a type of loan that allows homeowners to borrow against the equity in their property. The loan is secured by the property and is typically repaid over a fixed term with a fixed interest rate.
A home equity line of credit (HELOC) is a revolving line of credit that allows homeowners to borrow against their home equity as needed. It functions similar to a credit card, where you can borrow up to a predetermined credit limit and repay the borrowed amount over time.
For home equity loans, the interest is typically calculated based on the fixed interest rate over the loan term. For HELOCs, interest is usually variable and calculated based on the current prime rate plus a margin.
Home equity loans and HELOCs can be used for various purposes such as home improvements, debt consolidation, education expenses, major purchases, or other financial needs. The flexibility of how the funds are used depends on the borrower’s discretion.
Home equity loans provide a lump sum payment with a fixed interest rate, while HELOCs offer a revolving line of credit with a variable interest rate. Home equity loans have a fixed repayment schedule, while HELOCs have a draw period and a subsequent repayment period.
Lenders consider factors such as credit score, income, debt-to-income ratio, and the amount of equity in the property when determining eligibility for home equity loans and HELOCs.
