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Home equity loan vs. line of credit

There are two types of home equity loans: term, or closed-end loans, and lines of credit.

Both are sometimes referred to as second mortgages, because they're secured by your property, just like your original (first) mortgage.

Home equity loans and lines of credit are usually for a shorter term than first mortgages. The most common type of mortgages runs 30 years, while equity loans typically have a life of five to 15 years.

The loan

A home equity loan, sometimes called a term loan, is a one-time lump sum that is paid off over a set amount of time, with a fixed interest rate and the same payments each month. Once you get the money, you cannot borrow further from the loan. To see current home equity loan rates, use Bankrate's home equity loan rates tables.

The line

A home equity line of credit (HELOC) works more like a credit card. You are allowed to borrow up to a certain amount for the life of the loan -- a time limit set by the lender. During that time you can withdraw money as you need it. As you pay off the principal, your credit revolves and you can use it again. Let's say you have a $10,000 line of credit. You borrow $5,000, but then pay back $3,000 toward the principal. You now have $8,000 in available credit. This gives you more flexibility than a fixed-rate home equity loan.

Credit lines have a variable interest rate that fluctuates over the life of the loan. Payments will vary depending on the interest rate and how much credit you have used. When the life span of a line of credit has expired everything must be paid off. A lender may or may not allow a renewal. To see current home equity line of credit rates, use Bankrate's home equity line of credit rates tables.

Lines of credit are accessed by specially issued checks or a credit card. Lenders often require you to take an initial advance when you set up the loan, withdraw a minimum amount each time you dip into it and keep a minimum amount outstanding.

Financial institutions negotiate a home equity loan just like they do a mortgage: You have to pay off the loan or line of credit when you sell the house.

Which type should you choose?

The answer to this question is seldom black and white.

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