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Home Equity Loan Vs. Home Equity Line of Credit

Written by Andrea Klinedinst, Executive Administrative Assistant

Navigating the world of lending can be tough when you don’t work in it every day. There are so many terms to know and so many different types of loans. Some may sound similar in name but be different in function, for example, a Home Equity Loan and a Home Equity Line of Credit. How do they differ and how do you know which is the right choice for you? Our expert for this article, Andrew Lockwood, Mortgage Loan Officer at our Henry Banking Center, explains each of these loans and how to know which is right for your needs below.

Andrew Lockwood: Understanding the difference between a second mortgage loan, sometimes referred to as a Home Equity Loan, and a Home Equity Line of Credit, sometimes referred to as a HELOC.

Homeowners often want to tap into the equity of their home to fund various needs like home improvements, or major life expenses. Two loan products we have available here at MNB to access equity in your homes are second mortgage loans (Home Equity Loans) and Home Equity Lines of Credit. They both allow you to tap into the equity in your home but differ in how the loan is set up, repayment terms, and how to access the funds.

First, let’s discuss the equity in your home. Equity is the difference between your home’s current value and the mortgage balance. We generally loan up to 80% of the value of the home minus the current mortgage balance.

Home Equity Loans (second mortgage loans) are a lump sum loan that you receive all of the funds at once when you close on the loan. The payment is a fixed interest rate with monthly principal and interest payments over 10 or 15 years. Some borrowers prefer this as the interest rate and payment amount will not change.

Home Equity Lines of Credit differ as they function more like a credit card. They provide a revolving line of credit up to an approved limit allowing you to borrow as needed during a 10-year draw period so funds can be accessed when needed using home equity checks or debit cards. It can be paid to a zero balance anytime during the 10-year draw period and can be left open to borrow as needed. The interest rates are variable, meaning it can change over time, and the payment structure is interest payments based on the amount of money borrowed. Keep in mind that the interest payment does not decrease the principal balance. Extra money applied above the amount of interest will reduce the principal balance. This type of loan allows flexibility to borrow as funds are needed.

Both types of loans above are a second mortgage behind the first mortgage. There is a risk of losing your house if the payments are not made.

The choice between a Home Equity Loan and a Home Equity Line of Credit depends on your needs and preferences. If you need a large sum up front and prefer the stability of a fixed interest rate and a fixed monthly payment, then the Home Equity Loan is a good option. If you have ongoing variable expenses, want to borrow funds as needed, and are comfortable with interest rate and monthly payment fluctuations, then a Home Equity Line of Credit is a good option.

Reach out to any one of our mortgage loan officers to discuss options, set up an appointment or apply online through the MidAmerica National Bank website HERE. We would be glad to help!

You can reach us through our website or by calling 877-647-5050.