Equity credit lines or a HELOC loan, both are a form of homeowner secured loan that relies upon home refinancing in order to extend funds based on the equity in a home. Both accomplish the same initial goal, cash out home refinancing, but under two distinctly different methods.
An equity credit line is a revolving line of credit. What that means is that as you repay the amount borrowed that amount becomes available for you to borrow against again. The nature of an equity line of credit also permits for borrowers to access only a portion of the funds at a time.
These features of an equity credit line make it an ideal pool of emergency funds or a source of financing for an ongoing project, like home repair. The ability to borrow only portions of the line at a given time means that the borrower will only pay on the amount borrowed. Therefore if a equity line with a $100,000 limit is used as an emergency pool and the borrower dips into it to make a $20,000 draw the borrower will only pay interest on the $20,000, not the hundred thousand.
In this respect equity lines are very similar to credit cards, only with a typically lower rate (because unlike credit cards an equity line is a form of secured loan) and potential tax advantages. Equity lines also typically have a variable interest rate that adjusts with prime, so amortizing the line is impossible.
A HELOC loan, while also drawing on the equity of a home, operates in a very different manner. This loan is a loan, not a line. It is an installment loan- as opposed to a revolving line. This means that the loan is paid out in a lump sum at a fixed rate over a fixed period of time. Payments are amortized over the life of the loan.
When the loan is paid back it is simply paid. It may not be drawn upon again as needed.
The advantages of a loan over a line include the lack of a need for discipline, a fixed rate, and a definite payoff date. The disadvantage is the lack of flexibility in the amount financed and the inability to control when the distributions are made and therefore, how much of the loan is accruing interest at any given time.
While both an equity line and an equity loan draw on the equity of a home the terms of these secured loans can vary greatly. Both have their advantages and disadvantages that should be considered before taking either one of them out. A qualified loan officer can generally help a consumer into making the right choice depending upon their needs and requirements.