How is a Home Equity Line of Credit (HELOC) different from a traditional loan?

A Home Equity Line of Credit (HELOC) is fundamentally different from a traditional loan due to its flexible borrowing structure. With a HELOC, borrowers are given a credit limit that they can draw from as needed, similar to a credit card. This allows the borrower to withdraw funds up to a certain limit and pay interest only on the amount they actually withdraw, rather than on the total credit limit. The payments on a HELOC can vary based on the amount borrowed and current interest rates, which are often variable. This contrasts with a traditional loan, where a fixed amount is borrowed at one time, resulting in set monthly payments over a specified term.

The revolving nature of a HELOC means that as one pays down the balance, they can borrow again up to the credit limit, providing ongoing access to funds. This flexibility makes a HELOC particularly useful for managing expenses or funding projects over time. The absence of a fixed payment structure and the ability to borrow, repay, and borrow again distinguishes it from a traditional loan, highlighting its unique functionality in personal finance.