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Home Equity Loan vs Home Equity Line of Credit

What’s the difference and which one is right for you? 

You’re a home owner and that means responsibilities.

Keeping the lawn fresh and crisp, manicuring the hedges to perfection, cleaning the kitchen constantly, vacuuming every inch of carpet, and fixing random issues on a daily basis are only a small portion of your upkeep duties.

That’s a lot of work. So why not have your home do a bit of work, too? It’s time to get your house to pay you back by extracting value from it—and it all starts with either a Home Equity Loan (HELOAN) or Home Equity Line of Credit (HELOC).

But what’s the difference? Let’s take a closer look at both options to ensure you’re making the correct choice for your financial needs.

What They Are

HELOANs and HELOCs let you access and take advantage of your home’s equity—while you still live there—to help you achieve your goals. But they also add to your debt.

Both draw from the value of your home and can be essentially considered “second mortgages.” Although they’re used for similar reasons, how they work is quite different.

HELOAN

A Home Equity Loan is a lump sum that you receive all at once with a fixed interest rate over a fixed amount of time (term). That means your monthly payments stay the same throughout the duration of the loan.

  • Pro: If you can handle the cost of the fixed interest rate, consistent payments each month can make it easier to plan your finances.
  • Con: Accessing all your home’s equity at once can be risky if property values decrease in your neighborhood.

HELOC

A Home Equity Line of Credit is similar to a credit card. You borrow money as you need it from an available balance, and you only pay interest on the amount you take. HELOCs usually feature an adjustable interest rate, and may be refinanced to a fixed rate Home Equity Loan.

  • Pro: You only pay for what you use.
  • Con: The variable interest rate can increase over time and result in higher monthly payments.

When to Use Them

Many financial experts will maintain that your home’s equity should only be tapped for projects or purchases that will increase its value or for emergency needs like medical expenses. Generally, some smart reasons to leverage your home’s equity are:

  • Home improvements (adding an inground pool, updating windows, expanding a room, or finishing a basement)
  • Home repairs (replacing your roof or fixing your foundation)
  • Home purchases (buying a new septic tank or HVAC unit)
  • Medical bills
  • Debt consolidation

How to Choose

Planning a significant renovation or purchase? Choosing between a HELOAN or HELOC boils down to what you want to accomplish, how much it costs, and how much you really need. Be honest with yourself if using your home as collateral can help make it happen.

Remember: Before making a final decision, always calculate every financial factor including interest rates, monthly payments, and fees. By weighing all the associated costs and through careful planning, you can determine if a Home Equity Loan or Line of Credit makes sense for you.