HELOCs vs. Home Equity Loans: What’s the Difference?

High coordination Inflation and high interest rate Making it difficult for many people to stay on budget and/or pay off debt. While your regular expenses such as food and transportation may increase, at the same time, financing costs may also be higher than a year or so ago.

If you have credit card debt, for example, your annual percentage rate (APR) has likely increased recently, making it more expensive to pay off your balance. Or, if you’re looking to finance a home renovation, you may have noticed that estimated loan payments are higher than last year.

To offset the rising cost of debt repayment in addition to general expenses, you may be looking to tap into your home equity, which, fortunately for rising prices, has increased recently. One of the two most popular ways to access your home equity is to take out a foreclosure Home equity loan or open a Home Equity Line of Credit (HELOC).

If you think you might benefit from going this route, start exploring your options here now.

What is a HELOC?

A HELOC is a revolving line of credit based on the equity in your home. In other words, instead of getting a lump sum like you would with a normal loan, you get access to credit that you can draw on as needed, like using a credit card up to a certain limit. Like credit cards, HELOCs There are also usually variable interest rates.

What is a home equity loan?

A home equity loan is also based on the equity in your home, but it is a lump sum loan with a fixed interest rate. A home equity loan is often called a second mortgage, and it usually works similar to a regular mortgage.

The difference between HELOCs and home equity loans

Although the names sound similar and both are based on borrowing against your home equity, there are several differences between a HELOC and a home equity loan, such as:

• Lump Sum vs Line of Credit: While you can have the same access to funds with a home equity loan or HELOC, the way you borrow it is different. With a home equity loan, you borrow a lump sum, which can be a significant amount. With a HELOC, you have a line of credit that you can borrow from a little at a time if you want to, rather than all at once.
• interest rate: The biggest difference between a home equity loan and a HELOC is the interest rate structure Typically, home equity loans have fixed interest rates and HELOCs have variable interest rates.
• Payment Terms: HELOCs usually have a period in which you can draw from the line of credit, often around 10 years. During this time you can borrow money and make payments towards refreshing your credit limit. However, many HELOCs allow only interest payments during the draw period. After the draw period comes a repayment period, where you may have to repay the loan all at once or in installments depending on the terms of the loan. In contrast, home equity loans work like a regular mortgage, where you have regular repayment requirements after you take out the loan.

Not sure which one is right for you? Check and find out your eligibility and local offers online now!

Similarities Between HELOCs and Home Equity Loans

Although home equity loans and HELOCs work differently in many ways, they both provide a way to borrow against the equity in your home. With both types of financing, you’ll be using your home as collateral, so you want to be sure you can pay back what you borrow so you don’t lose your home.

With both HELOCs and home equity loans, you can typically have a combined loan-to-value (CLTV) ratio of up to 85%. That means any existing debt on your home, such as your first mortgage, plus a HELOC or home equity loan can equal up to 85% of your home’s appraised value.

The exact amount may be higher or lower based on the lender and your personal situation, but many lenders have similar limits for HELOCs and home equity loans.

How can you determine which option is best?

Choose between a home equity loan or HELOC—or other types of borrowing, such as cash-out refinancing — depends on a variety of factors, such as your current credit situation, your risk tolerance and the amount of money you want to borrow.

For example, if you are worried about future interest rate increases, you may choose to get a fixed rate home equity loan now. But if you don’t need to borrow that much right away, you may prefer the flexibility of a HELOCAlthough this may mean higher borrowing costs in the future.

Either way, taking out this type of loan or line of credit can be a big decision. Make sure you do your research, such as comparing lenders and perhaps talking to a trusted advisor about which one makes the most sense for your situation.

Crunch the numbers here to see which option is best for your situation or see the table below to learn more.