What’s the difference between a HELOC and a Home Equity Loan?
A HELOC and Home Equity Loan sound very similar, but have distinct differences that will help you determine which lending product is best for you to renovate your home, fund a large purchase or expense, pay off credit card or high-interest debt, or even start a business. Both products should be considered with care and used responsibly as they are secured by your home.
What does HELOC stand for?
HELOC stands for Home Equity Line of Credit.
What is a home equity line of credit?
A HELOC is a revolving line of credit secured by the equity in your home. Its use is similar to a credit card in that you can use the funds as needed and repay on a monthly basis. Each time you repay the funds you’ve used, that amount becomes available for you to use again.
How is the equity in my home determined?
The equity in your home is determined by subtracting the amount outstanding on your mortgage from the current market value of your home. For example, if your home is appraised and valued at $275,000 and you owe $100,000 on your mortgage, you home has $175,000 in equity. Typically you can use up to 80-85% of your home’s equity on a HELOC.
What can I do with a home equity line of credit?
Home equity lines of credit are typically used to fund home improvement or renovation expenses, but can also be used for many other things including:
• Paying down credit card or other high-interest debt. Since your home is being used as collateral on the line, it typically has lower interest rates than other types of loans.
• Covering unexpected expenses or large purchases. If your emergency fund or savings won’t cover an expense or if you would like the flexibility to pay over time, the funds from your HELOC can help you do this. This may include medical bills, repairs, or other large expenses.
• Education costs. If you or your children are thinking of going to college, in many cases the rates on a HELOC are lower than the rates on student loans. With a home equity line of credit you have the option to make tuition payments as they are due and repay them over time.
What are the repayment terms on a HELOC?
Home equity lines of credit include a “draw period” and a “repayment period”. The draw period, which is typically 5-10 years, represents the time during which you can borrow against the line before it must be refinanced. Monthly payments during the draw period are interest-only, but you have the option to pay towards the principal balance if you wish. When the draw period has ended the repayment period begins you can no longer borrow against the credit line. In the repayment period, monthy installments include principal and interest and can be significantly greater than during the draw period.
What is the interest rate on a home equity line of credit?
HELOC interest rates vary by institution, but are generally based on prime rate plus a margin determined by your lender. As prime rate fluctuates, so will the cost of your line of credit.
What is a home equity loan?
A home equity loan — sometimes called a second mortgage — is a loan that uses your home as collateral. When you take out a home equity loan, you receive funds based on the amount of equity in your home.
How can I use a home equity loan?
A home equity loan can be used for many things, including home repairs, home renovations, high-interest debt consolidation, education expenses, and more.
What are the repayment terms on a home equity loan?
Home equity loans disburse funds — typically up to 80-85% of the equity of your home — in a lump sum. These funds are to be repaid over a set period of time.
What is the interest rate on a home equity loan?
Home equity loan rates vary by lender, but these loans are fixed-rate products. This means the cost of your loan will remain the same until it has been satisfied. Be sure to shop around to make sure you get the best rate possible.
Home Equity Line of Credit vs. Home Equity Loan
|Home Equity Line of Credit||Home Equity Loan|
|Revolving line of credit||Funded by a one-time lump sum|
|Can use up to 80-85% of the equity in your home||Can use up to 80-85% of the equity in your home|
|Variable interest rates||Fixed interest rates|
|Typically a 5-10 year draw period, followed by a 5-10 year repayment period. Requires refinancing to continue using the line at the end of the repayment period.||Predetermined repayment term set at the beginning of the loan|
*This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.