HELOC vs. Home Equity Loans: A Comparison
HELOC vs. Home Equity Loans
Home equities have seen historic rises over the last two years. So, naturally, homeowners are curious to learn how they can leverage this new-found equity to their advantage. For this comparison, home equity is defined as the difference between what you still owe on your loan and the current market value of your home.
Two of the most popular ways to flex the financial muscle of your home equity are the Home Equity Line of Credit (HELOC)* and a home equity loan. We'll present both options, explore their differences and benefits, and help you make a more informed decision. With that in mind, let's take a look.
What’s the difference between a HELOC and a home equity loan?
As an aside before we start, let's briefly touch on how a HELOC and a home equity loan are similar. Both tap into your home equity, but perhaps more importantly, they both use your home as collateral. This means that payments and terms may be more agreeable to you than an equivalent amount of credit card debt.
Unlike credit cards, however, it also means that if you are not able to make payments, you could lose your house. So, just make sure that you're in a position to make those payments, and you should be good to go.
Now, the difference between the two is how the funds from your equity are disbursed. With a home equity loan, you get all the funds up front in one lump sum. The amounts for a loan tend to be higher than with a HELOC, at least in terms of how much equity is used at once.
Home equity loans can range anywhere from 10 to 30 years, and they are paid off in monthly installments. The minimum monthly payment amount depends on the interest rate and term of the loan. Home equity loans are similar in many ways to mortgages, and often take the form of a second mortgage, but they tend to process much faster and carry a higher interest rate than fixed-rate mortgages.
On the other hand, a HELOC is an ongoing line of credit, like a credit card, but one that taps directly into your home equity. Typically, this line of credit can be accessed for several years during what is known as the "draw term." Payments during this time tend to be a lower amount than a home equity loan, though the payments will likely go up once the draw term ends.
Normally, a draw period will last 10 years during which time you can draw out equity from your mortgage. After that time, the HELOC balance, plus the interest, will switch over to a 20-year repayment period.
What are the benefits of a HELOC?
With a HELOC, it's not just a one-and-done. The credit line is more flexible and long term than a home equity loan, allowing it to be brought to bear on any number of projects that might pop up during the draw period. A short list might be medical expenses, home renovation, college tuition, auto payments, and more.
If you are disciplined with your finances, and are not prone to overspending, a HELOC may be just the boost you need to soar over life's financial hurdles as they come your way.
What are the benefits of a home equity loan?
A home equity loan is great for when you know what you need and don't anticipate tapping into your equity down the line. So, this one-time infusion of funds is a way to overcome an obstacle that you've identified, rather than as a contingency against future bumps in the road.
Being able to tap into the potentially vast amount of funds at your disposal can be awfully enticing, so if you wish to avoid that kind of temptation, a home equity loan is a potential way to get those assets — everything you need, nothing you don't.
Home Equity Loan vs. Line of Credit: Which is right for me?
As you can see, there are advantages to both kinds of home equity access. How do you determine which one is the right choice? Simple — think about what you will use the funds to do, and over what period of time. You might think of it like this:
- Immediate and predictable: If you have a clear vision of what you want your home equity to do, don't anticipate needing additional assets down the road and want a payment that's reliably the same each month, a home equity loan may be what you need.
- Flexible and ongoing: Maybe you've identified a few things you need to address but anticipate needing more capital in the future. If the peace of mind of being able to answer financial challenges as they come your way is attractive to you, a HELOC could be for you.
How can I start on a HELOC?
We recommend that you start by speaking with one of our knowledgeable mortgage professionals. We have the industry experience and know-how to go through all the ins and outs of borrowing against your home equity with a HELOC.
The first step to put in your application to see if you qualify. (Our mortgage experts can help you with that, too.) If that checks out, you'll be able to determine how much equity you can access.
It's also a good idea to go ahead and write out what you're trying to accomplish and get estimates on how much it will cost to reach those goals. This will give you a clearer picture of how to use your home equity to meet your needs. Considering how high home equities have skyrocketed in recent times, we think you'll be surprised at what you'll find.
So, if you're ready to start putting your home equity to work for you, we can help you apply for a home equity line of credit today.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and for more information. All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Guaranteed Rate, Inc. Guaranteed Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
* Guaranteed Rate Inc. home equity line of credit (HELOC) is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. This product is currently not offered in the states of New York, Utah, Kentucky, South Carolina, Hawaii, Texas, West Virginia, Delaware and Maryland. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact Guaranteed Rate for more information and to discuss your individual circumstances. Restrictions Apply.