Your home can be more than just a place to live. It can also be a valuable financial resource and asset. If you're planning a home improvement project, consolidating debt, or covering any type of major expense, you've likely seen the terms HELOC and Home Equity Loan.
While both are great options and allow you to borrow against the equity you've built in your home, they work very differently. Understanding the differences can help you choose the option that best fits you and your financial goals.
Key Differences
Here is a quick comparison of the two types of loans:
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HELOC: It is a revolving line of credit, and you can borrow only what you need, when you need it. You only pay interest on the exact amount you borrow, all at a variable rate.
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HELOAN: You receive your funds in a lump sum, often suited to high, one-time costs, all at a fixed rate. This can make it easy to budget for because your payment is the same every month.
Now that we can see some of the key differences, here is a closer look at each loan and why one may be a better choice than the other.
HELOC
A HELOC stands for a Home Equity Line of Credit. This type of loan is secured by the equity you've built in your home. When applying for a HELOC, you are applying for an open line of credit. Then you can borrow up to a set amount on an as-needed basis.
For example, if you're remodeling your kitchen, you might use your HELOC to purchase new countertop materials now and replace cabinets a few months later. Because it's a revolving line of credit, you can borrow funds as new expenses and projects arise.
In some ways, this type of loan is like a credit card. You are given a set amount to borrow when you need it. Your line of credit remains available during the draw period. You only begin making payments on the amount you've borrowed once you've started using it while the interest is only built on the amount you have taken from the line of credit.
Home Equity Loan
A home equity loan (HELOAN) is a second mortgage. This is a fixed-rate loan secured by your home, given in one lump sum, and repaid in regular monthly payments.
Homeowners often use these funds to consolidate high-interest debt, finance a major home renovation, or cover other large, one-time expenses. A home equity loan is often the better choice when you know exactly how much you'll need to borrow.
A home equity loan often comes with lower interest rates because these loans are secured by your home. The interest rate is fixed at the time of loan funding, and the total amount of funds is given to you right away. This also makes it easier to budget and plan for, as your payment is the same each month.
Both a HELOC and a Home Equity Loan allow you to put the equity you've built in your home to work. The right option depends on how you plan to use the funds and whether you need the flexibility or a fixed loan amount.
If you're interested in learning more about these types of loans, you can visit our website here.
If you're considering different financing options but aren’t quite sure which would be the best fit for you, our team of expert lenders is happy to help. Speak to one of our mortgage officers today.
