Home Equity Line of Credit vs Refinance
A home equity line of credit, or HELOC, is a type of second mortgage, vs a refinancing where the terms of the existing debt are renegotiated.
A refinancing pays off the existing mortgage and opens a new loan with new terms, whereas a HELOC leverages the equity in your home to open a line of credit.
Home Equity Line of Credit vs Cash Out Refinance
A home equity line of credit, or HELOC, is a type of second mortgage, vs a cash out refinance which replaces your existing mortgage with a new loan of a greater amount.
The proceeds from that loan pay off your existing mortgage and the remaining funds go to you.
Line of Credit Definition
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What Is a Line of Credit?
A line of credit, or LOC, is money lent to an individual or business which the borrower pays interest on.
Depending on the type of LOC, the client either receives a lump sum, or is allowed to “draw against” their line of credit to make purchases, until the credit limit is reached.
Typically lines of credit are given by banks, such as when an individual is issued a credit card.
What Is a Line of Credit and How Does it Work? Revolving vs Non-Revolving
Lines of credit will either remain open, or will close, once the loan has been repaid.
Revolving lines of credit are considered “revolving” because an individual’s credit is replenished when some or all of the outstanding debt has been paid off.
In contrast, a non-revolving line of credit is closed once the account is fully paid off, such as a student loan or mortgage.
Non-revolving credit usually has a lower interest rate.
How Does a Line of Credit Work? Secured vs Unsecured
Loans may be unsecured loans, or secured by collateral.
A home equity loan is an example of a collateralized loan, whereby the home is the collateral and will be claimed by the creditor in the event of a default on the loan.
Credit card loans are almost always unsecured, which causes creditors to take on more risk and is why credit card interest rates are generally higher and the borrowing limits are generally lower than secured loans.