If you own a home in the United States and need credit, you’ve probably heard of a Home Equity Loan and a HELOC (Home Equity Line of Credit). Both are ways to tap into the value you’ve built in your home, but they work in different ways. Understanding the specifics of each can help you make a more informed and secure financial decision. Here are the details!
What Is Home Equity?
Before diving into the differences between the two types of loans, it’s important to understand what home equity is. It’s the amount of your home that you truly own — basically, the difference between your home’s current market value and the remaining balance on your mortgage.
For example, if your home is worth $400,000 and you still owe $250,000, your home equity would be $150,000. This is the amount lenders use as the basis for offering you either a Home Equity Loan or a HELOC.
What Is a Home Equity Loan?
A Home Equity Loan is a fixed-rate loan with a set term. You receive a lump sum of money upfront and pay it back in fixed monthly payments over a term that usually ranges from 5 to 30 years.
The funds are disbursed all at once, with fixed interest rates and consistent payments. Because it’s a standard type of loan, it works well for one-time expenses like home improvements, debt consolidation, or emergency costs.
This type of credit acts like a second mortgage and typically requires good credit and a significant amount of built-up equity in your home.
What Is a HELOC?
On the other hand, a HELOC works more like a revolving line of credit — similar to a credit card — but backed by your home as collateral. Instead of receiving a lump sum, you’re approved for a credit limit and can borrow from it as needed during a period known as the draw period, which typically lasts 10 years.
This offers more flexibility, but the interest rates are usually variable. You’re required to make minimum monthly payments during the draw period, followed by a repayment period where you pay off the remaining balance.
A HELOC is ideal for those who need ongoing access to credit, such as for phased home renovations or long-term projects.
Differences Between Home Equity Loan and HELOC
| Feature | Home Equity Loan | HELOC |
|---|---|---|
| Type of Credit | Lump sum | Revolving line of credit |
| Interest Rate | Fixed | Variable (in most cases) |
| Fund Disbursement | All at once | As needed |
| Payments | Fixed monthly payments | Minimum payments during draw period |
| Best For | One-time expenses | Ongoing projects |
What Are the Risks?
Both Home Equity Loans and HELOCs use your house as collateral. This means that if you don’t make payments as agreed, your lender could foreclose on your home.
Another point to consider is that with a HELOC, since the interest rate is variable, your monthly payments could increase over time — raising your risk of falling behind.
Which One Is Better?
The best option depends on your financial profile and how you plan to use the funds. Here are a few common scenarios:
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Home Equity Loan: better if you need a fixed amount, want predictable payments, and prefer to avoid fluctuating interest rates.
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HELOC: more suitable if you want flexible access to funds and have the discipline to borrow only when necessary.
How to Apply
You can apply for either a Home Equity Loan or a HELOC through banks, credit unions, or online lenders. Common eligibility criteria include:
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Having at least 15% to 20% equity in your home
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A good credit score (usually 620 or higher)
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Proof of stable income
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A reliable financial history
The process usually includes a home appraisal, credit check, and signing a loan agreement using your home as collateral. Requirements can vary depending on the lender, location, and current market conditions. It’s a good idea to speak with a loan officer or advisor to understand the latest qualifications.
Conclusion
Understanding the difference between a Home Equity Loan and a HELOC is key to choosing the best fit for your financial needs. Both options can offer access to lower interest rates than personal loans, but they come with risks. Make sure to assess your goals, compare offers, and pay attention to the key details before deciding which one works best for you.
All information in this and other BOISLA articles is subject to change over time. Please check for updates directly with the institutions and companies mentioned. Approval is subject to the institution’s review.
REFERENCES:
https://www.bankofamerica.com/
Read more about finances in https://boisla.com/category/blog/
