A home equity loan and home equity line of credit (HELOC) are alike in that both are secured by your home, just like the first mortgage you obtained to buy your place. That’s why home equity loans commonly are referred to as “second mortgages.”

Both loans are usually for shorter terms than first mortgages. Home equity loans and HELOCs are paid off within five to 20 years, while 30 years is typical of a first mortgage.

But there are several differences between home equity loans and HELOCs, and it’s important to understand them if you’re considering an equity loan.

A HELOC has a variable interest rate that is tied to a benchmark interest rate, such as The Wall Street Journal Prime Rate. As the prime rate moves up or down, so does your HELOC rate. Payments will vary depending on the interest rate and how much credit you have used.

The borrower accesses the line of credit using specially issued checks or a card that looks like a credit card. Lenders often require you to take an initial advance when you set up the loan, withdraw a minimum amount each time you dip into it, and keep a minimum amount outstanding.

Financial institutions treat a home equity loan just like they do a mortgage: You must pay off the loan or line of credit when you sell the house. And if you fall behind on payments or default on either loan, a lender can foreclose on your home.

Home equity loan

A home equity loan is a term loan in which the borrower gets a one-time lump sum. The loan is repaid over a fixed term, at a fixed interest rate, with equal monthly payments.