Home Pop Culture The Difference Between a Home Equity Loan and a HELOC

The Difference Between a Home Equity Loan and a HELOC

home equity loan
Figuring out whether to apply for a home equity loan or use HELOC. Stock image.
home equity loan
Figuring out whether to apply for a home equity loan or apply for a HELOC? Stock image.

The Difference Between a Home Equity Loan and a HELOC: How consumers are figuring out the best way to fund and invest for their futures?

Consumers who have some equity built up in their homes often consider borrowing against that total. It’s usually a smart way to acquire needed funds for an emergency or lucrative investment. But what are the key differences between the two primary ways of borrowing against home equity: the home equity loan, and the HELOC, or home equity line of credit?

Here are some important things to know if you intend to borrow against your built-up equity:

    *  The Basics: Generally speaking, a HELOC is very similar to a credit card in that the borrowers don’t receive a lump-sum of cash, but has access to a capped amount of funds. A standard home equity loan is much like a personal loan in that you get X amount of money up front and pay it back over a set period of time. There are, of course, advantages and disadvantages to each type of arrangement.

     *  Rate Types: As far as flexibility goes, HELOCs often allow borrowers to use either fixed or adjustable rates. Home equity loans are almost always set up with fixed interest rates.

     * Funds for the Borrower: Home equity loans deliver funds in a lump sum to borrowers, which can be an advantage, depending how you intend to use the money. The other product offers up front cash on your desired draw amount.

     *  Interest: With a HELOC, borrowers only have to pay interest on whatever amount of cash they withdraw against the account limit, not on the entire limit. For borrowers who use a standard home equity loan, there is interest charged on the entire balance from the first day of the loan contract. The fixed interest rate is typically a bit higher than the rates on HELOCs, but borrowers are also getting the security of a fixed rate. The variable rates can change within a wide range, greatly affecting your monthly payment.

    *  Interest-Only Payments: HELOC can offer the opportunity for borrowers to pay interest-only on the amount borrowed, for a certain period of time. Traditional home equity loans have no such option and regular payments are due each month, including both interest and principal. 

    *  As-Needed Funding: There’s a risk with home equity loans that borrowers will need more money for a given project or might not need as much as they borrowed. With a HELOC, borrowers can draw funds on an as needed basis, which can make good sense for things like home remodeling, education expenses. The plus with a HELOC in situations like these is the flexibility in accessing the funds.

For borrowers who know how much money they need for a specific project and want the security of a fixed rate, the home equity loan is the way to go. If you don’t need a lump sum and have uncertainty about what amounts of funding you’ll need, and are comfortable with an adjustable rate, then a HELOC makes sense. Keep in mind that many lenders will allow you to convert your HELOC to a fixed rate under certain circumstances.