When it comes to using the equity in your home to borrow money, two popular options are a home equity loan or a home equity line of credit (HELOC). Both of these methods are quite different, which is why it is important to know the key differences before you speak to a lender.

Home Equity Loan

What makes a home equity loan unique is that it is an amortized loan. This means that you are given a payoff period that is a set number of years. You must pay off the loan by that deadline by making fixed monthly payments, which are made up of a mix of principal and interest. A home equity loan also gives you the entire amount of money that you are borrowing up front, which makes it a closed-ended loan. Once you make a payment you cannot get that money back. 

The type of people that use a home equity loan typically have a mortgage that is already paid off or close to being paid off. They can then use a home equity loan as a second loan, which is in addition to the original loan if it exists. It's also best for making a very big purchase since you get the value of your home's equity upfront and can do what you want to do with it. 

Home Equity Line of Credit

A HELOC is a bit different because it isn't amortized. Instead, the loan uses simple interest based on the daily balance of your equity line of credit. If you are not currently borrowing from your HELOC then you are not paying any interest on it. This makes a HELOC a revolving form of credit since you can reuse the payments that you have made. It's very much like using a credit card, but at a much lower interest rate.

Much like a home equity loan, a HELOC can be used in addition to your primary mortgage. However, you can also refinance your mortgage and use a HELOC as a primary mortgage if you want to. It all depends on how you want to consolidate your loan and what the current interest rates are.

HELOCs are best for people that need to borrow money but don't need it all at once. You can use it for a home renovation project, which requires payments at different times during the process, which you may want to start paying off sooner rather than later. Click here for more information on home equity loans.