With a home equity loan, you can borrow against the money you've already put into your mortgage. A home equity loan is basically a second mortgage, which is a loan that is backed by your property. If you don't pay your bills, the bank or lending company can force you to sell your house to get their money back.
Home equity loans and home equity lines of credit, also called HELOCs, are the two main types of home equity loans. Most people who give out home equity loans offer both types. A $10,000 home equity loan and a $10,000 home equity line of credit are two different things, even though they have many of the same features.
"Home Equity Loan":
If you apply for and get a $10,000 home equity loan at 7% APR for 15 years, you will get a check for $10,000 or have $10,000 put into your bank account. That is the maximum loan amount you can ever take out with that application. Depending on the terms, you may have anywhere from one to several months before you have to start paying back the loan. You'll pay the same amount every month until the loan and interest are paid off in full. You'll know right away how much you'll have to pay back.
"Line of Credit Against Home Equity" (b)
A HELOC, which stands for "home equity line of credit," is much more like a credit card. When you apply for and get a home equity line of credit, the bank sets up a "line of credit," which works just like your credit card's "credit limit." You might get special checks or a plastic card that lets you use your line of credit, but you don't get the whole amount all at once.
You don't even have to take any of it right away. You can borrow up to the full amount of the line of credit at any time during the agreed-upon length of the loan. Let's say you're fixing up your house. You can buy $2,000 worth of roofing tiles with your home equity line of credit. That leaves you with a total of $8,000. Three weeks later, you can use your line of credit to pay for $4,500 worth of windows and still have $3,500 left to borrow against.
When you start paying back your home equity line of credit, you can use that money again. If you pay back $1,000 of what you've borrowed, your line of credit is now worth $4,500.
A home equity line of credit has two "phases." During the draw period, you can borrow up to your credit limit as long as you don't go over it. During that time, you can choose to pay only the interest that builds up, or you can pay down the principal to get it out of your way. After the draw period is over, you start paying back the loan. During the repayment period, you can't make any more withdrawals from the line of credit and must pay it back in full.
