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While these two loan types really have the same basic rules for approval, they work a bit differently. When you are close a Home Equity Loan, in three days you will be given a bank check for the entire amount of your loan. Three days after you close a Home Equity Line-of-Credit (HELOC), you most often will receive no funds from your lender. You will, however, be given a number of checks from your lender or be allowed to write checks from your own account for amounts up to and including the full amount of your loan.
If you have a specific purpose for the majority of your proceeds, you might be better off with a home equity loan. Like a first mortgage, your payments will have been calculated and a complete amortization schedule will apply. Should you not immediately need all of your proceeds, but plan to disperse these funds over a longer time period, a HELOC may better serve you. You will owe interest only on the amount of your loan you have used instead of the entire amount, which will keep your payments lower than a fully dispersed loan until you have drawn your balance to the maximum. Often a HELOC will only require monthly interest payments, again maintaining minimum cash due each month. For cash flow purposes, this is an obvious advantage to you. However, there is no loan reduction unless you also include principal payments. This can become dangerous and should not become a formal plan of action.
|Jennifer Mathes, Ph.D.|