Home equity loans and home equity lines of credit (HELOC) are both viable options for homeowners who need to access equity in their homes.
But what are the key differences between the two types of loans, and how do you know which one is right for you?
For starters, a home equity loan is a second mortgage. This means that if you default on the loan, your lender can foreclose on your home just as they could with your first mortgage.
On the other hand, a HELOC is a line of credit that is secured by your home equity. This means that if you default on the loan, your lender can foreclose on your home, but only after exhausting all other collection methods.
Learn more about each option to determine which one is right for you.
Is a home equity loan right for me?
A home equity loan is a second mortgage. This means that if you default on the loan, your lender can foreclose on your home just as they could with your first mortgage. This also means that you’ll pay for this loan in addition to your existing mortgage.
Home equity loans have fixed rates, which means that you’ll know exactly how much interest you’ll pay over the life of the loan.
Home equity loans are typically available in larger amounts than HELOCs, so a home equity loan may be the better option if you need to borrow a large amount of money.
Pros of home equity loans
- You’ll know exactly how much interest you’ll pay over the life of the loan.
- Home equity loans are typically available in larger amounts than HELOCs.
Cons of home equity loans
- If you default on the loan, your lender can foreclose on your home.
Should I open a HELOC?
A HELOC is a line of credit that is secured by your home equity.
This means that if you default on the loan, your lender can foreclose on your home, but only after exhausting all other collection methods.
HELOC rates are variable, which means that your interest rate will fluctuate with the prime rate. This can make budgeting difficult.
HELOCs are typically available in smaller amounts than home equity loans, so if you only need to borrow a small amount of money, a HELOC may be the better option.
Pros of HELOCs
- If you default on the loan, your lender can only foreclose on your home after exhausting all other collection methods.
- HELOCs are typically available in smaller amounts than home equity loans.
Cons of HELOCs
- Your interest rate will fluctuate with the prime rate, which can make budgeting difficult.
- HELOCs typically have lower loan-to-value ratios than home equity loans, which means that you may need to have more equity in your home to qualify for a HELOC.
Home equity loan vs. line of credit
Both methods of tapping into your home equity gives you the freedom to spend cash on whatever you want, whether that be a wedding, home improvement, or outstanding debt.
How you get the cash, however, differs between each one. A home equity loan is a lump sum payment, good for when you know the amount you need. A HELOC works like a credit card that you use as needed.
Another key difference is that home equity loans have fixed rates, while HELOC rates are variable. So with a home equity loan, you’ll know exactly how much interest you’ll pay over the life of the loan. With a HELOC, your interest rate will fluctuate with the prime rate, which could cost you over time.
Finally, home equity loans are typically available in larger amounts than HELOCs. So if you need to borrow a large amount of money, a home equity loan may be the better option. Though you should be aware of what your lender allows—many often require that you keep a certain amount of equity in your home.
How do I know which loan is right for me?
Both options have their pros and cons, so the best option for you will depend on your individual circumstances.
The best way to decide whether a home equity loan or HELOC is right for you is to speak with a qualified lender and compare your options. Be sure to ask about interest rates, loan terms, and fees so that you can find the option that best meets your needs.
Photo by Mikhail Nilov