A home equity loan or line of credit amounts to an arrangement where a borrower’s home acts as protection/collateral for a loan. In essence, your home becomes a source of credit to finance home improvement projects, education, retirement programs, and other big ticket items. Generally, your bank or lending institution will allow you to draw upon a fixed amount of equity. This number is based on a percentage of the appraised value of your property minus the rest of the money you owe on your mortgage.

Two Types of Home-Equity Loans

Home equity loans come in two varieties – fixed-rate loans and lines of credit – and both types are available with terms that generally range from five to 15 years. Another similarity is that both types of loans must be repaid in full if the home on which they are borrowed is sold.

Fixed-Rate Loans Fixed-rate loan provide a single, lump-sum payment to the borrower, which is repaid over a set period of time at an agreed-upon interest rate. The payment and interest rate remain the same over the lifetime of the loan.

Home-Equity Line of Credit A home-equity line of credit is a variable-rate loan that works much like a credit card and, in fact, sometimes comes with one. Borrowers are pre-approved for a certain spending limit and can withdraw money when they need it via a credit card or special checks. Monthly payments vary based on the amount of money borrowed and the current interest rate. Like fixed-rate loans, the home-equity line of credit has a set term. When the end of the term is reached, the outstanding loan amount must be repaid in full.