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There is a difference between home equity loans and a home equity line of credit, commonly referred to as a HELOC. With a standard home equity loan, a single lump sum will be borrowed and repaid in monthly installments, similar to what you’d find with a typical loan. Home equity loans often have a fixed interest rate and the loan takes about 25 to 30 years to pay back in full. Your second option is opening a home equity line of credit through a reputable lender. This line of credit is used similarly to a credit card, where the lender authorizes the applicant to withdraw money as the borrower sees fit. Unfortunately, HELOCs have an adjustable rate with interest-only payments and a 10 year draw period. Once the draw period has ended, the borrower must pay the outstanding balance in full, which normally takes about 15 years per customary contract.
To begin the process of obtaining a loan or line of credit, you’ll need to find a bank in your area offering home equity loans or home equity lines of credit. If you know that you have a bad credit score, keep in mind that the lender will still run a credit check and could deny your application if your score doesn’t meet bank standards. Fortunately, you’ll have better luck of getting one of these loans than a personal loan because your credit score is not the only deciding factor in approving your case. Lenders want to know that you have owned your home for awhile and aren’t a brand new buyer, and they also want to know that you’ve been routinely consistent on mortgage payments. Understanding the difference between home equity loans and a HELOC can be an important advantage when choosing the option perfect for your financial needs.