HELOC
A HELOC is different from a conventional home equity loan in
that you are not advanced the entire sum up front, but use a
line of credit to borrow sums that total no more than the credit
limit, similar to a credit card. HELOC funds can be borrowed
during the "draw period" (typically 5 to 25 years).
Repayment is of the amount drawn plus interest or interest only
depending on they agreement. You can always pay more and pay
the loan down and re-use the funds for the life of the draw period.
The full principal amount is due at the end of the draw period,
either as a lump-sum balloon payment or according to a loan amortization
schedule.
Another important difference from a conventional loan is that
the interest rate on a HELOC is variable. The interest rate is
generally based on an index, such as the prime rate. This means
that the interest rate can change over time. The rate of the
HELOC is based upon the Index + a margin and the margin is the
difference between the prime rate and the interest rate the borrower
will actually pay.
A HELOC is categorized as a mortgage and is secured with a Deed
of Trust against the real property.
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Home Equity Loan
A home equity loan (sometimes abbreviated HEL) is similar to
the HELOC but with one major difference - A HELOC is a line of
revolving credit with an adjustable interest rate whereas a home
equity loan is a onetime lump-sum loan, often with a fixed interest
rate.
Home equity loans are most commonly second position liens (second
trust deed), although they can be held in first position. Most
home equity loans require good to excellent credit history, and
reasonable loan-to-value and combined loan-to-value ratios.
Home equity loans are mortgage loans just like the HELOC and
will be secured with a Deed of Trust. When considering these
types of loans, you should sit down with a mortgage professional
to make sure this is the right type of loan for you and your
situation.
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