Discover the differences between home equity loans and home equity lines of credit (HELOC), as well as how each can be used.

Tapping into a home’s equity is a popular way for homeowners to access cash. Home equity loans and home equity lines of credit (HELOC) both allow people to obtain funds that can be used for a variety of purposes, but it’s important to note that they work differently.

How home equity loans work

A home equity loan is sometimes referred to as a second mortgage because it requires set monthly payments and uses the home as collateral. Typically, the interest rate is fixed for the duration of the loan’s term.

When you’re approved for a home equity loan, you’ll receive a lump sum. Repayment of the loan with interest is often for a term of five to seven years, but it can be longer.

How HELOCs work

A HELOC is a line of credit that you can borrow against, repay and draw on again. For example, if a homeowner has a $50,000 HELOC, uses the full amount and pays back the $50,000 with interest, they can access $50,000 again, which can be repeated multiple times.

Keep in mind that the homeowner doesn’t have to draw the full amount. From our example above, the homeowner with a $50,000 HELOC may only use $15,000 initially. By drawing less than the credit limit, the homeowner would still have access to $35,000.

There are two periods for a HELOC; a draw period, typically 10 years, when the homeowner can withdraw cash and a repayment period.

During the draw period, the lender may only require interest payments.

Repayment periods for HELOCs are often 20 years, but can be as long as 30 years. The loan must be paid off in full when the loan term expires.

A HELOC’s interest rate is variable and may change each month. Like a home equity loan, a HELOC uses your home as collateral.

How to calculate home equity

To determine how much home equity you have, first determine your home’s value. A lender will likely require a professional home appraisal, but you can estimate a ballpark figure by using online home valuation tools. Second, add up the value of any outstanding loans on your house, such as a primary mortgage. Then subtract the amount owed from the value and you’ll see how much equity you have.

Here’s an example of calculating home equity:

Current Market Value of Home      $300,000
Mortgage Balance                           -$175,000
Homeowner’s Equity                       $125,000

The homeowner above could potentially access $125,000 with a home equity loan.

Discover more

Learn more about tapping into your home’s value with a Consumers home equity loan or line of credit. We can help you get access to cash when you need it at a competitive rate.

Consumers helps thousands of members finance land, first and second homes, and home improvement projects each year. We’d love to help you with a mortgage or home equity line of credit; contact us online or call us at 800.991.2221.