Both loans can be used for anything you want, but they differ in how cash is accessed and how they’re repaid.

One of the advantages of building home equity is that it gives you access to more financial tools. Specifically, home equity loans and home equity lines of credit (HELOCs) which can be used for almost anything you want. Which one you choose depends on your goals. Here’s a quick overview of how each type of loan works and how they’re often used.

What the loan types have in common

First, let’s look at what home equity loans and HELOCs have in common.

Both allow homeowners to access cash secured by home equity.

Lenders determine the loan amount based on the home’s value and how much equity the owner has. Typically, lenders will allow loans up to 80% of the home’s value, less what’s owed on the mortgage and any existing home equity loans.

What’s the difference between a home equity loan and HELOC?

The two types of loans differ in their logistics.

A home equity loan provides a lump sum and has a fixed rate. Repayment is made in fixed installments until your loan is paid off. Often, repayment is made within five to seven years, but it could be longer. You might also hear a home equity loan called a second mortgage.

A HELOC is a revolving line of credit. You’re approved to borrow up to a certain limit. For a certain amount of time called the draw period—often ten years—you can borrow funds as you need them. As the money is paid back, you can draw on the credit again—as many times as you like.

During a HELOC’s draw period, you may only be required to make interest payments. After the draw period ends, the loan balance is paid back with interest over 20 or 30 years. The repayment time frame is spelled out in the original loan, so there are no surprises.

Also, most HELOCs have a variable interest rate tied to a benchmark index, like the Federal Reserve’s prime rate. The frequency of rate changes is outlined in the loan’s terms which also state the cap, or maximum interest rate. A HELOC’s interest rate can go up or down, depending on which way the benchmark moves.

Benefits of home equity loans and HELOCs

Homeowners who get a home equity loan or HELOC do so because of the advantages, including:

• Flexibility: the money can be used for almost anything you want
• Possible tax savings: the interest may be tax deductible
• Lower interest costs: home equity loans and HELOCs usually have lower interest rates than other personal and vehicle loans, as well as credit cards

What homeowners need to consider

Home equity loans and HELOCs are powerful and flexible financial tools. They make it possible for people to do things like pay for a child’s education, start a business, make home improvements or buy a second home. However there are risks to keep in mind.

Remember that home equity loans and HELOCS use your home as collateral. If you have trouble paying back the loan you could lower your credit score and risk foreclosure.

Also, if home values go down, you could find yourself owing more on a mortgage and a secondary home loan than the home is worth.

Even with possible risks, many homeowners use home equity loans and HELOCs for improvements that increase their home’s value or provide a path to better-paying careers.

How to choose between a home equity loan and a HELOC

Your goals determine which type of loan is best.

A home equity loan is best when you need a lump sum. For example, when you’re renovating your kitchen. Home equity loans are suitable for folks who like knowing exactly how much their payments will be.

A HELOC is desirable when you want access to cash when expenses will recur over time or are unpredictable—like paying for college or medical expenses. Also, some homeowners like to have a HELOC in case they need cash for an emergency. When choosing a HELOC, ensure that your budget accommodates payments that can vary over time.

Get more home loan answers

If you’d like to know more about Consumers home equity loans and HELOCs, call us at 800.991.2221, or reach out to one of our mortgage loan officers.

 

All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications, and collateral conditions.