HELOC vs a Home Equity Loan: Which is Right for You?

The equity you’ve built in your home can be a powerful financial tool, especially if you're looking to borrow money for home improvements, consolidate debt or cover other large expenses. Two popular ways to tap into this equity are through a home equity line of credit (HELOC) or a Home Equity Loan. While both options use your home as collateral, they function quite differently. In this article, we’ll delve into the specifics of each to help you determine which might be the right choice for your financial situation.

What is Home Equity?

Before diving into the differences between a HELOC and a Home Equity Loan, it’s important to understand what home equity is. Put simply, home equity is the difference between the current value of your home and the outstanding balance of your mortgage. For example, if your home is worth $400,000 and you owe $200,000 on your mortgage, you have $200,000 in equity. Our convenient HELOC calculator can help you determine the amount of equity you’ve built in your home, as well as your estimated monthly HELOC payments. 

HELOC: A Revolving Line of Credit

A Home Equity Line of Credit (HELOC) is a revolving line of credit. You’re approved for a specific amount of credit based on the equity in your home, and you can borrow up to that limit. Here's what you need to know:

Flexibility: HELOCs offer flexibility. You can borrow what you need, when you need it, up to your credit limit. This makes HELOCs ideal for expenses that may come in waves, such as home renovations. But that’s just the tip of the iceberg. HELOCs have many great uses. 

Draw and Repayment Period: A HELOC usually consists of two phases: a draw period, during which you can borrow against the line of credit, and a repayment period, during which you must repay the borrowed amount with interest.

Interest-only Payments: During the draw period, many HELOCs allow you to make interest-only payments, giving you lower monthly payments. However, once the repayment period begins, you'll need to start paying off both the principal and interest.

A HELOC can be helpful for improving your home’s value, continuing your education, starting a business, consolidating debt and much more. It’s useful for improving your home’s value, continuing your education, starting a business, consolidating debt and much more.

Home Equity Loan: A Lump-Sum Loan

Unlike a HELOC, which functions as a revolving line of credit, a Home Equity Loan provides you with a one-time lump sum based on your home's equity. Here are its features:

Fixed Terms: Home Equity Loans usually come with a fixed interest rate, fixed monthly payments and a set repayment timeline. This predictability can make budgeting easier compared to the fluctuating payments of a HELOC.

Lump-Sum Payment: Since you receive the loan amount upfront, a Home Equity Loan can be beneficial for large, one-time expenses, such as paying for a wedding or consolidating high-interest debt.

Interest Rates: Generally, the interest rates for Home Equity Loans might be slightly higher than the starting rates for HELOCs. However, because they're fixed, you're protected from future interest rate increases.

HELOC vs. Home Equity Loan: Key Considerations

Purpose of the Funds: If you have a singular large expense, a Home Equity Loan might be more suitable. On the other hand, if you anticipate multiple expenses over time, a HELOC offers the flexibility to draw funds as needed.

Costs and Fees: Both options may come with fees, such as closing costs or annual fees. It's crucial to understand the complete cost structure of each before deciding.

Duration of Loan: Consider how long you're comfortable having your loan. While HELOCs often have longer draw periods, they can also come with longer repayment timelines, which might result in more interest paid over time.

Tax Implications: Typically, interest paid on both HELOCs and Home Equity Loans is tax-deductible when the funds were used to buy, build or substantially improve the taxpayer's home. Always consult with a tax professional to understand the current tax implications.

Both HELOCs and Home Equity Loans offer valuable ways to leverage the equity in your home, but they cater to different needs and financial situations. By understanding the features, benefits and potential risks of each option, you can make an informed decision about which is right for you. Remember, your home is collateral for both types of loans, so it's imperative to borrow responsibly and ensure you can manage the repayments. If used wisely, both options can be powerful tools in your financial arsenal.

If you think a HELOC would be right for you, apply now.