Hi, what are you looking for?

Finance for Homeowners

What’s the difference between a HELOC and HELOAN?

So what’s the difference between a HELOC vs. home equity loan, and which one is right for you? Learn more about these two borrowing options that each use your home equity to access cash.

What’s the difference between a HELOC and HELOAN?

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 HELOC and HELOAN? 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.

Read more: How a Fixed-Rate HELOC Option Works

Join our mailing list

Blog Opt-In (General)

Latest

Investor Center

Today we are sharing performance data from the Prosper Portfolio for December 2021. Highlights from the report include: Performance Update In December, approximately 60%...

Prosper Blog

We’re excited to announce the launch of the Prosper® Card!  Now you can take control of your finances with access to affordable rates and...

Graphic showing dropping interest rates and mortgage rates Graphic showing dropping interest rates and mortgage rates

Financial Literacy

Best Ways to Use Low Interest Rates  Now is a great time to borrow money.  To continue to aid in the economic recovery from...

Person learning about financial management Person learning about financial management

Best Practices

Most people can’t help but let their emotions affect their financial management decisions, even if it’s subconscious. We learn many of our attitudes about...

Company News

We’re excited to announce the Prosper: Personal Loans App to improve borrower experience! Now you can explore new loan options or manage your existing...

Performance Updates

Today we are sharing performance data from the Prosper Portfolio for November 2021. Highlights from the report include: Performance Update • In November, approximately...

You May Also Like

Credit Management

Unemployed and looking for ways to borrow money? We’ll reveal what options you have when it comes to accessing emergency loans with no job.

Best Practices

Even before COVID, expensive healthcare costs had many Americans wondering what happens if you don’t pay medical bills. If you’re struggling with medical bill...

Finance for Homeowners

Taking out a HELOC to pay off your mortgage is a common practice among many homeowners today. Read more to find out the pros...

Financial Literacy

With the right interest rate and terms, a personal loan from a trusted lender can provide an avenue for getting out of debt, funding...