If you’re looking to finance a large-scale home improvement project or consolidate debt, you may find yourself asking: What’s the difference between a Home Equity Line of Credit (HELOC) vs. Home Equity Loan? And which one is better for my financial situation?
Home Equity Loans (HELOANs) and Home Equity Lines of Credit (HELOCs) are two popular financing options that allow you to draw on the equity you’ve built in your home to pay for certain expenses. Both a HELOAN and a HELOC use your home as collateral, which means these financing options tend to boast lower interest rates than credit cards or personal loans.
Here are the main differences to consider when weighing a HELOC vs. home equity loan so you can make the best decision for your needs.
HELOC vs. Home Equity Loan
What’s a HELOC?
A HELOC is a revolving line of credit from which you can borrow at any time during the “draw period,” which typically lasts 10 years. The bank or lender will provide you with a maximum line amount, similar to a credit limit, and you can borrow up to that limit as needed during the draw period. You’re only responsible for paying back the amount you borrow. Each time you make a payment on your HELOC, your line of credit replenishes, just as it would when you pay down a credit card balance. During the draw period, your monthly payment options are flexible, allowing you to make interest-only payments if need be.
Most HELOCs come with a variable interest rate, which means the interest rate may go up or down depending on market conditions – although some lenders give you the option to fix your HELOC’s interest rate several times over the life of your line. Once the draw period ends, you can no longer borrow any additional funds. You’ll then enter a repayment period, during which you’ll pay back the principal amount plus interest. The repayment period typically lasts between 10 and 20 years.
What’s a HELOAN?
When you qualify for a home equity loan, you’ll receive the loan in a lump sum upfront. Most HELOANS have a fixed interest rate, so your monthly payment (including principal and interest) will remain the same throughout the lifetime of the loan.
When is a HELOC the best option?
When you’re considering a HELOC vs. home equity loan, think about the amount that you actually need. If you’re not sure exactly how much you’ll be spending but want to be able to cover unexpected costs that may arise over a long period of time, a HELOC may be the best fit for your situation. If you suspect you’ll need to draw money over time, like with a long-term project or a larger ongoing expense, a HELOC may be best for you. A HELOC also gives you the flexibility to borrow only the amounts you need and pay back those amounts as you go.
When is a HELOAN the best option?
A HELOAN may be a better fit for you if you have fixed costs and you prefer the stability of a long-term, fixed monthly payment. Since HELOANs provide a one-time lump sum of money, this type of loan may be better for a larger, one-time expense–like a vacation or an unexpected medical bill. With a Home Equity Loan, you’ll also have the benefit of a spending cap already in place, and you’ll know exactly how much you’ll have to repay.
Bottom Line
When you’re deciding whether to apply for a HELOC vs. home equity loan, calculate how much money you need and when, and whether you want a fixed or variable monthly payment. HELOCs are great if you want the flexibility to borrow as needed over a longer period of time, while HELOANs are a great way to access a one-time lump sum of money. Keep in mind that with both options, your home is used as collateral in exchange for lower interest rates and larger credit limits. Talk to your lender to see which option is best for you.
