Home Equity Loan

Both home equity loans (HEL's) and a home equity lines of credit (HELOC's) are second mortgage loans which are secured by a home (secured meaning the home is collateral. If the borrower gets into trouble servicing the loan, the home could end up in foreclosure.)

A HEL is like a first mortgage in that the interest rate is fixed, the borrower receives a lump sum at closing and the borrower will service the loan via amortized payments, typically for 15 years.

A HELOC, on the other hand, is more like a credit card, in that the interest rate is variable (usually indexed to the Prime Rate) and the borrower can access as much or as little of a given credit line over the life of the HELOC. HELOC's also resemble credit cards in that borrowers are only required to pay the interest that's due at the end of each statement month. The repayment term can be as long as 30 years.

Flexibility
Though HELOC loans come with a variable interest rate, which often makes them less attractive than a HEL, they can be useful for homeowners who like to keep their options open. That's because with a HELOC, you can transfer debt in or back out of the credit line as you wish. You can't do that with a HEL.

Also, with a HELOC, if Prime starts to rise, many lenders will let you convert your variable-rate HELOC to a fixed rate loan, allowing you to lock in a favorable interest rate.