Basic Terminology: HELOC and HELoan

As a borrower there are two main options for tapping into your home's equity. A HELOC, or a Home Equity Line Of Credit, is known as an open-ended loan. A HELoan, more commonly just refered to as a 2nd mortgage, is also known as a closed-end loan. In a HELoan scenario the borrower receives a fixed sum at the beginning of the loan period with repayment terms that are similar to a 1st mortgage. HELoans do not allow subsequent withdrawals. With a HELOC the borrower has a line of credit to draw from, and the payments are based only upon the portion of the credit line that is being used. HELOC payments are often amortized over a shorter time period than a closed-end loan, with a monthly payment that varies based on the unpaid balance and the current interest rate. HELOCs have some of the best interest rates for any type of mortgage, but they are almost always variable rates. For an identical loan amount and withdrawal amount a HELOC might still have a higher monthly payment than a HELoan because of the shorter term, but the loan will be paid down faster. HELOC withdrawals are normally made via special checks or credit cards. Many lenders require a minimum initial withdrawal, and subsequent withdrawals are also often subject to a minimum. The main benefits are the low interest rate and that you are only paying for the part of the credit line that you are actually using.