Understand the Difference
HELOCs (Home Equity Lines of Credit) and home equity loans have distinct characteristics. HELOCs provide flexibility to borrow and repay funds during a draw period, while home equity loans offer a lump sum amount.
Whether you’re looking to remodel the kitchen, pay for college or need emergency cash, home equity lines of credit and home equity loans are popular ways to tap into your home’s equity. Both options let you borrow money against the value of your home, but they work differently and have their own pros and cons.
So which option is right for you? In this blog, we’ll help you decide.
A home equity line of credit is a revolving line of credit — think of it like a credit card. With a HELOC, you can borrow and repay funds as many times as you wish during a set period of time known as a “draw period,” typically 5 to 10 years. During this time, you can borrow up to your approved limit and only pay interest on the amount you borrow.
After the draw period ends, you enter the repayment period. During the repayment period, you can no longer borrow and must begin to repay both the principal and interest on your outstanding balance. HELOCs usually have variable interest rates, meaning your monthly payment will fluctuate based on market conditions.
A home equity loan, sometimes known as a second mortgage, is a one-time lump sum loan. With a home equity loan, you repay the loan with a fixed interest rate over a set period of time, typically 5 to 30 years. Monthly payments for a home equity loan are a fixed amount that includes principal and interest, meaning your payment stays the same over the life of the loan.
The choice between a variable-rate line of credit or a fixed-rate loan depends on your financial situation and how you plan to use the funds. If you need funds for a short-term expense or a series of smaller expenses, a HELOC may be a better option because of its flexibility. If you need money for a large expense, such as a home renovation or college tuition, a home equity loan may be a better option because of the upfront lump sum and predictable monthly payments.
With either option, keep in mind that interest may be tax deductible if you use the funds to “buy, build, or substantially improve” your home and itemize on your tax return. It’s also important to remember that both HELOCs and home equity loans are secured by your home, meaning the lender can foreclose on your home if you can’t make your payments. It’s essential to borrow only what you need and can afford to pay back.