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Home Equity

Home Equity Loan Basics

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Home equity loan vs. line of credit

If you’re considering borrowing from the available Glossary Term: equity in your home, you may wonder about the similarities and differences between a home equity loan and a home equity line of credit. Here’s a quick look at some of the key factors to consider.

What you might use the funds for

A home equity loan is often used for large one-time expenses, like big home-improvement projects.

A home equity line of credit can be used for one-time expenses, like a kitchen or bath remodel, or those that may occur over a period of time, like ongoing home improvements, tuition, or other emergency expenses.

How you receive your funds

With a home equity loan, you receive a lump sum when your loan closes. So you’ll receive the entire amount of your loan at one time.

With a home equity line of credit, you’ll get a line of credit that you can draw from as needed during the permitted draw period, which is generally 10 years. You’re typically allowed to borrow as little or as much as you need, up to your available credit limit. Most lenders will provide you with options to easily access your credit line; for example, checks, online banking, and an access card that functions like a credit or debit card except that your purchases get charged to your home equity line of credit which is secured by your home.

Interest rates

Home equity loans have a fixed interest rate, so you’re protected from payment fluctuations throughout the life of the loan. Because of this, rates for home equity loans can be higher than for home equity lines of credit.

Home equity lines of credit have a Glossary Term: variable interest rate. The rate is based on a financial index plus a margin and will vary with the index. Home equity lines of credit typically carry lower interest rates than home equity loans. Some home equity lines of credit have an option during the loan term to convert all or a portion of the outstanding variable rate balance to a fixed rate. Bank of America home equity lines of credit include this Fixed Rate Loan Option.

How you repay the funds

With a home equity loan, you’ll pay the loan back on a monthly repayment schedule, and your monthly Glossary Term: principal and Glossary Term: interest payments will remain the same.

With a home equity line of credit (HELOC) at Bank of America, you are required to make Glossary Term: variable-rate monthly minimum payments that include principal and interest. Principal and interest payments are made during the draw period (generally 10 years), and during the repayment period (generally 20 years). During the draw period, you could also pay down additional principal and interest, usually without penalty. Paying down principal during the draw period allows you to replenish the amount of available credit you have. Regardless of how you make your payments, you’ll only pay interest on the amount you withdraw and not the entire line amount.