HELOC vs Home Equity Loan: Which is Right for You?
A home equity line of credit (HELOC) and a home equity loan are both ways to borrow money based on the value of your home, but they have differences. A home equity loan, also known as a second mortgage, allows you to borrow a set amount of money against the value of your home and repay it over a set period. A HELOC is a line of credit, similar to a credit card, but it's secured by your home and gives you access to a revolving line of credit.
If you’ve been thinking about getting a home equity loan or line of credit, chances are you have heard the terms used interchangeably and probably wondered if they mean the same thing. The answer is that they serve similar purposes but are different regarding how you're borrowing the funds. Keep in mind that both loans will impact your credit report, so it's important to make regular payments on the balance to impact your score and future loans positively.
A home equity loan lets you borrow against your home’s equity and pay back the loan over time with a fixed interest rate. You receive the money in one lump sum, and you pay it back in fixed monthly payments over a specified period which can be an advantage in knowing how much you'll need to budget each month.
Meanwhile, a HELOC gives you access to a revolving line of credit, so you have the flexibility to borrow multiple times from a maximum available amount, but it's up to you to budget accordingly and make your regular payments on the balance. Interest rates vary over time which is different from a traditional home equity loan.
The main difference between a HELOC and a home equity loan is how they’re paid out and how they’re paid back. A HELOC is a good option to have as a safety net should any unexpected or tragic events come about. At the same time, a home equity loan is a great option for a specific event, such as paying for your children’s college or renovation projects.
If you’re considering making a large purchase, paying down existing debts, or doing some remodeling on your current home, stop by our credit union and talk to one of our financial experts. We’ll be happy to help you determine whether a HELOC or a home equity loan is your best financing option. Contact us today!