Learn The Difference Between A Home Equity Loan vs. HELOC

HELOCs and home equity loans are loans where you use your home as collateral. Both are good options for borrowing money if you’ve paid a significant portion of your mortgage. Some homeowners think that these two are similar, but in reality, they are not the same.

Let’s look at how these loans work and the significant differences between the two.

What is a home equity loan?

A home equity loan allows you to borrow against your home equity with a fixed interest rate and term. The rate would be based on your credit score, loan amount, payment history, and income.

You can use the cash from the loan however you want like for home renovations or paying off credit card debts.

What is a HELOC?

A HELOC, on the other hand, is a line of credit similar to a credit card. This allows you to borrow up to a specified amount from your home equity and slowly repay the loan.

HELOC terms have two parts: the draw period and the repayment period. The draw period is when you can withdraw funds and can last up to 10 years. The repayment period may last 20 years, so the overall term is 30 years in this case. You also can not borrow any more once the draw period ends.

What are the differences between a home equity loan and a HELOC?

Here are the major differences between the two:

HELOC interest rates are variable, while home equity loan rates are fixed.
HELOC monthly payments change over time, while home equity loan payments are the same every month.
HELOC funds are disbursed as needed, while home equity loans are paid upfront.
HELOC repays interest-only during the draw period while repaying principal and interest afterward. Home equity loan payments begin as soon as the loan is disbursed.

When is a HELOC better than a home equity loan?

A HELOC is the better choice when:

You want a revolving credit line to get funds from and pay down variable expenses.
You need a credit line available for future expenses but don’t need the cash at the moment.
You are intentional with your spending and don’t buy on impulse.

When is a home equity loan better than a HELOC?

A home equity loan is a better choice when:

You prefer a fixed monthly payment since you live on a fixed income
You know precisely how much you need for an expense
You are going for debt consolidation but choose not to access a new credit line

Both home equity loans and HELOCs can provide funds by using your home as equity. Before you decide which is best in your situation, you should determine how much you need, the purpose of your loan, and whether or not you would like to borrow more in the future.

If you are having trouble deciding, you can get in touch with our loan advisors, who can help you pick the best loan option given your specific needs.

Give us a call or send us a message today.

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