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Home equity loan: Everything you need to know

1: Home equity loans 

A home equity loan is essentially a second mortgage, which means a debt secured by your home beyond your initial mortgage. A home equity loan is paid to you as a lump sum, and after you have received the loan, you begin repaying it immediately at a fixed interest rate, meaning you repay an arranged amount each month for the life of the loan, whether that is five, 10, or 30 years.  

If you have a significant, and pressing, expense, a home equity loan may be ideal. Home equity loans are also stable due to the consistent monthly payments.  

2: Home equity lines of credit (HELOCs) 

A home equity line of credit, or HELOCS, functions similarly to a credit card, giving you the ability to withdraw as much money as you want up to the credit limit during the draw period, which is often up to 10 years. Your credit revolves allowing you to reuse it as you pay down the HELOC principal, which also provides you with the flexibility to get the funds that you require.  

You also have the option to select interest-only payments or combine principal and interest payments, which would be more beneficial if you need to repay the loan fast. Typically, HELOCs are offered at variable rates, which means that your monthly payments may decrease over the life of the loan, depending on market fluctuations. While lenders do offer fixed-rate HELOCs, they usually carry a higher initial interest rate and occasionally an extra fee.  

When the draw period ends, you have to pay the remaining principal balance and interest. Usually, repayment periods are between 10 and 20 years. And if you are using the HELOC for a substantial home renovation, the interest on it may be tax deductible, so it is important to understand the conditions of your HELOC—and potential benefits.  

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