Guide to Home Equity Loans Chapter: 1 2 3 4 5

The Home Equity Family Tree

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This isn't the kind of tree that grows into a seemingly endless network of twigs and leaves. Home equity loans are simply two branches of the second mortgage tree, and come in two types: a fixed-rate loan and an adjustable-rate line of credit.

Home equity loan

A home equity loan is ideal for anyone who doesn't like surprises. It provides one lump sum payment that you'd pay back in fixed monthly installments, generally over the course of 10, 15, or 30 years. Unless you miss a payment, the maturity date and the interest rate won't change. This is the type of loan that you could set up on auto-pay, and forget about until it's paid off.

Home equity line of credit

The home equity line of credit (HELOC), is a revolving debt with an approved credit limit. You can borrow some or all of it. Once you repay it, you can borrow the money again. Monthly payments can be low. Sometimes, you're only required to pay interest, or merely 1 percent of the outstanding balance. HELOCs carry a variable interest rate tied to the prime rate. If the prime rate is 8.25 percent, and your rate is "prime plus 0.25 percent," your rate would be 8.50 percent. Since the prime rate changes periodically, your interest rate will move up or down during the life of the loan.

Now that you've met the second mortgage siblings, you're ready to start thinking about which one you like better.

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