EchoBay Expert: Are the interest rates charged for a home equity loan and a home equity line of credit calculated in the same way?
Loyal Reader: No, the costs associated with these loans are not the same. If you take out a home equity loan, or a HEL, you'll probably receive a lower interest rate but will also have to pay closing costs and points associated with the loan.
With a home equity line of credit, or a HELOC, you won't pay closing costs or points, but you'll probably wind up with a higher interest rate. With a home equity loan, it is possible to get a fixed interest rate, whereas with a home equity line of credit, you will have an adjustable rate.
This means that your interest rate can go up or down depending on the index and margin that your lender uses to calculate their interest rates.
If interest rates rise substantially, your payments will rise as well and you may wind up spending more than you would have if you had opted for a home equity loan with a fixed rate, so closing costs alone should not be the sole determining factor in whether to obtain a HEL or a HELOC.