HEL Vs. HELOC: What You Absolutely Must Know About These Home Loan Programs.
05/04/2010 The world is full of acronyms and as handy as they are, they can be confusing. Take HEL and HELOC, for example. They look similar, but they're very different.
HEL and HELOC stand for Home Equity Loan (HEL) and Home Equity Line of Credit (HELOC) respectively. Both offer ways homeowners can borrow money using equity from their homes. Each is usually considered a second mortgage, and each uses the borrower's property as collateral. HEL's and HELOC's usually offer the lowest mortgage rates compared to other types of loans or revolving credit, and may have tax advantages; benefits that add to their appeal.
Although they usually offer lower interest rates, the fact that a HEL and a HELOC use property as collateral makes them risky. If a borrower can't repay the loan, or doesn't make timely payments, the property could be seized by the lender. In addition, borrowers usually have to repay HEL and HELOC balances before refinancing a first mortgage or before selling the home. And now the differences
With a HEL, a borrower gets a lump sum of cash. It's usually the preferred choice when a borrower needs to cover a large, one-time expense. The loan amount is determined by a number of factors including the borrower's credit history, income, and the loan-to-value ratio on the primary mortgage. The maximum loan amount is usually 100% of that amount, but can be as high as 125%. Repayment of principal and interest is usually fixed for the loan term or other specified time period. Some HEL's offer adjustable rates.
A HELOC on the other hand is a line of credit. The amount of the credit line is specific and the borrower draws from the line only as much as is needed, whenever it's needed. Interest is charged only on the amount drawn. Like a credit card, the borrower makes monthly payments on the line. Minimum monthly payments vary and can be as low as repaying interest only. HELOC terms typically run between 10 and 20 years and at the end of the period must be repaid in full, plus interest. The interest rate on a HELOC is usually a variable rate based on the prime rate plus a margin.
When you need cash to finance a home improvement or other expense, HEL's and HELOC's are options worth pursuing. As always, shop around to see which lender offers the best deal.
