What is the difference between a Home Equity Line of Credit (HELOC) and a Home Equity Loan (HEL) and why does it matter? In short, both mortgage loan programs are designed to be Junior Liens (to go into 2nd Lien position behind a 1st mortgage).
Home Equity Line of Credit (HELOC) - is a revolving line of credit. Many refer to a HELOC as a credit card on steriods due to the fact that it acts in the same manner as a credit card, but with much higher credit limits and payments oftentimes.
- Pros - flexibility, the feeling of having a "money tree" to pick from in a pinch, only being charged on the balance owed when utilizing the money in different phases (such as home improvements that do not all take place simultaneously), interest-only payment option (to allow more monthly cash-flow when desired)
- Cons - Adjustable Rate Mortgage (ARM) can and will change over time, credit limit may be retracted (reduced) at any time the Lender desires (this trend happened to thousands of Homeowners across the country when the housing crisis occurred in/after 2017 and property values decreased), interest-only payment option (mentioned again for a reason...the "con" in this case is that Homeowners often become accustomed to this low payment, yet are unaware that they are not actually reducing the principal loan balance when making this payment and/or that at some point the Lender will want the principal paid...resulting in higher monthly payments in the future)
Home Equity Loans (HEL) - can suitably be described as a mini-mortgage with FIXED payments over a specified period of time (oftentimes +/- 15 years)
- Pros - Fixed Interest Rates, predictable monthly payments
- Cons - no flexibility to re-use the money after you pay down principal, no ability to reduce scheduled monthly payment amounts even when a higher-than-required monthly payment is made on any given month, higher interest rates than traditional 1st mortgages
When determining whether to pursue a Home Equity Line of Credit (HELOC) or a Home Equity Loan (HEL) or even an option of a Cash-Out 1st Mortgage, I recommend understanding the concept of a weighted average (aka blended average).
Additional strategies exist, which I am always happy to elaborate. Please feel free to contact me for any residential mortgage information, quotes, clarifications, and/or strategies, including the difference between Home Equity Lines of Credit (HELOC) and Home Equity Loans (HEL).