After the recession in 2008, it can be seen that many mortgage loans have become defaulters and hence one must have thorough knowledge if one decides to go for a mortgage loan. Now, home equity loans can be given in two types – one is the term or closed end loans while the other is the line of credit. Both are home equity loans and are known as second mortgages, since both are sanctioned against the first property.
Usually it has been seen that lines of credit and home equity loans are given for a comparatively shorter term than the first mortgages. Where the first mortgages are found to run for 30 years, the equity loans are supposed to be repaid within a span of 15 years.
When the home equity loan is given as a term loan, it has to be returned within a fixed set time and there will be a fixed interest rate and the payment amount will be same every month. But a home equity line of credit (HELOC) is more or less like a credit card. You will be given a limit up to which you can borrow and that too, for the time limit set by the lender.
In the line of credit, as you go on paying off the principal, the credit becomes revolving and you can use it in the future for withdrawing. The Line or credit gives you more flexibility than the fixed term loan. You can withdraw money when you need it and repay it when you have it. The borrower in this equity loan gets more flexibility than the term loan.
The interest rates for line of credit will vary during the life of the equity loan. Payment requirement will vary depending on the amount of credit used and the interest rate.