Both home equity loans and home equity lines of credit capitalize on the built-up equity in a home. While both can be a good source of funds for debt consolidation or other uses, the interest rate associated with a home equity line of credit (HELOC) is usually slightly higher than the interest rate associated with the home equity loan. This is due to the higher risk that the lender assumes with a HELOC due to the revolving credit, as opposed to the more conventional structure of a conventional home equity loan.
In spite of the home equity line of credit's interest rate, many homeowners choose a home equity line of credit debt consolidation loan for the flexibility it offers them. Since a HELOC works something like a credit card, a homeowner can tap into it just when they need it and for any specific amount, rather than a lump sum borrowed all at once. A HELOC debt consolidation loan can be tailored to exactly match the amount of debt that is being paid off, and then the HELOC itself can be paid off in whatever monthly payment the homeowner chooses to pay, as long as the minimum payment amount is met.
Many homeowners like the convenience and the flexible repayment options associated with a home equity line of credit debt consolidation loan. Instead of trying to track and pay multiple credit card payments, they only have to make one payment each month on their HELOC. The amount of the payment can be as little as interest only, or they can make a larger payment and pay down their balance so they will have more credit available in the future.
A word of warning: as tempting as it may be to make interest-only payments on a HELOC debt consolidation loan, it's not a good idea. If the goal is to get out of debt, the only way to accomplish this is to make regular payments that cover both the loan interest and at least a portion of the principal that is owed.
There are a few other terms and conditions to watch for when considering a HELOC debt consolidation loan: