If you're a homeowner who needs money to renovate, pay for repairs, or another purpose unrelated to your property, you may be in luck. If you have enough equity in your home, you can use it to secure a loan or a home equity line of credit (HELOC).
With a home equity loan or HELOC, your home is used as collateral, giving lenders peace of mind. If you default on your payments after borrowing money, they have an easy means of getting repaid -- they can foreclose on your home and recoup what's owed to them.
As such, it's relatively easy to qualify for a home equity loan or HELOC, provided that you have equity (you've paid down at least part of your mortgage). But, while both options are viable when you need to get your hands on cash, it often pays to opt for a HELOC over a home equity loan.
Home equity loans versus HELOCs
Home equity loans and HELOCs are both a means of borrowing against your home.
With a home equity loan, you borrow a specific amount of money and pay it back over time, just like any other type of loan. You’ll be put on a monthly payment schedule, and your payments will be a function of the amount you borrow coupled with the interest rate you secure (and it’ll probably be a favorable one, which is a benefit of home equity loans).
With a HELOC, on the other hand, you're not borrowing a lump sum and locking yourself into a repayment plan. Rather, you're securing a line of credit that you can draw on as the need arises. Say you're granted a $20,000 HELOC. If, six months later, you need $5,000, you can withdraw that sum, after which you’ll need to pay it back over time. You’ll then have access to the remaining $15,000 to borrow as needed. After you've paid back the $5,000, you can take out the full $20,000 if you need it.