What’s The Difference: Home Equity Line Of Credit Verses Home Equity Loan

Owning a home is a big expense—especially when it comes to maintaining the home and improving its value.

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When you need to borrow money for an emergency like flooding, there are two options you may consider: a home equity line of credit or a home equity loan. While similar in premise, these two options have several differences that you will need to take into consideration:

Home Equity Line Of Credit: Borrow What You Need, When You Need It

Home equity line of credit (HELOC) acts like a credit card, using your home “as cash”. If you have good credit and enough home equity, you will be approved for HELOC and able to borrow money when you need it, up to your loan limit.

A HELOC typically lasts for 5-10 years and if you have a remaining balance left, you are required to pay it back at the end of the loan period. Interest rates for HELOCs are variable, which means they can rise and fall so your payments may be lower one month and higher the next.

Home Equity Loan: When You Know How Much You Need

Also known as a second mortgage, a home equity loan uses your home as collateral, giving you a fixed amount of money to work with, rather than revolving credit like a HELOC. A home equity loan is typically for when you know how much you need to borrow, thus gaining a lump sum to use as you need.

With a fixed interest rate, your monthly payments won’t change for a set period. However, if you use all of your home equity at one time, you will have a harder time building up your home equity again if home values in your area decline.

Both Come With Fees & Should Be Carefully Considered

Both home equity loans and HELOCs come with closing costs and fees not unlike a standard mortgage and your home is used as collateral. Both can also be used for non-home purchases like college tuition and medical emergencies.

Neither of these options should be used for purchases such as cars or vacations, as these items depreciate value over time, removing an important source of emergency funds for when you actually need them.

Before you take out a home equity loan or HELOC, talk to your financial advisor and lender to see if either of these options is right for you.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.