How does a home equity line of credit (HELOC) differ from a home equity loan?

A home equity line of credit (HELOC) differs from a home equity loan primarily in terms of how the funds are accessed and the structure of the repayment. With a HELOC, borrowers are provided with a revolving line of credit, similar to a credit card, which allows them to withdraw funds as needed up to a predetermined limit. This provides flexibility for the borrower to access and repay funds over time, paying interest only on the amount that is drawn.

In contrast, a home equity loan offers a lump sum payment at the outset. Borrowers receive this amount in one transaction and then repay it over a fixed term with scheduled payments, typically at a fixed interest rate. This distinction is essential as it impacts cash flow management, the way interest is calculated, and how borrowers can utilize their home equity.

These differences highlight why understanding the terms and functionalities of each type of lending product is important for homeowners considering leveraging their equity.