Home Equity Loan vs. Home Equity Line of Credit?
A home equity loan and a home equity line of credit (HELOC) are both ways to borrow against the equity you've built up in your home, but they differ in how they provide funds and how they are repaid. Here's a breakdown of the main differences:
Home Equity Loan
Structure: A home equity loan is a lump-sum loan, meaning you receive the entire loan amount upfront.
Interest Rate: Typically has a fixed interest rate, so your monthly payments remain the same over the life of the loan. Usually 20, 15 and 10 Year Term options.
Repayment: Payments are made in fixed monthly installments, similar to a traditional mortgage.
Best For: Large, one-time expenses like home renovations, debt consolidation, or major purchases.
Home Equity Line of Credit (HELOC)
Structure: A HELOC works more like a credit card. You have a credit limit, and you can borrow as much as you need, whenever you need it, up to that limit.
Interest Rate: Usually has a variable interest rate (tied to the Prime Rate), which means your payments can fluctuate based on the market. When you hear of the Fed raising or cutting rates, HELOCs typically move in unison.
Repayment: During the draw period (typically 10 years), you may have the option to make interest-only payments or 1.5% of the outstanding balance. After the draw period ends, the repayment period begins, during which you can no longer borrow and must start repaying both principal and interest. Typically clients elect to do a modification or refinance to avoid this.
Best For: Ongoing expenses or projects where you need access to funds over time, such as home improvements, education costs, or as a financial safety net.
Fixed Rate Conversion Options - Some banks allow you to convert a portion or all of your line to a fixed rate. The rate offered would be based on the current market. Banks vary in allowing you to do this between 3-5 times, meaning you could technically lock in 3-5 different balances as you take advances on the line but do not want to be exposed to the variable rate, especially in a time of rising interest rates.
Summary
Home Equity Loan: Fixed sum, fixed rate, fixed payments.
HELOC: Flexible borrowing, variable rate, variable payments (initially interest-only).
Choosing between the two depends on your financial needs, repayment preference, and how you plan to use the funds.
