A Home Equity Loan and Home Equity Line of Credit are both loans that use your home as collateral. Though they are very similar, they are different loans. Keep reading to learn what a Home Equity Loan and Home Equity Line of Credit are, their differences, and their benefits!
What Are They?
A Home Equity Loan and Home Equity Line of Credit, commonly known as a HELOC, are both loans which use your home as collateral. Both are fantastic options for borrowing money if you’ve paid down a significant portion of your mortgage.
Home Equity Line of Credit: A HELOC is a line of credit in which the lender will agree to lend a maximum amount within an agreed-upon period and variable interest rate. Essentially, a HELOC uses a percentage of your home’s equity to provide a revolving line of credit, much like a credit card. Your monthly payments with a home equity line of credit will change over time. With a HELOC, disbursement of funds is made on an as-needed basis and repayment is interest-only during the draw period; you repay all the principal and any remaining interest afterward.
Home Equity Loan: A home equity loan is very similar; however, a home equity loan is a lump sum that is disbursed upfront and paid back in fixed installments. Your monthly payments will be the same each month. With a home equity loan, disbursement of funds is an upfront lump sum and repayment starts as soon as the loan is disbursed.
The Main Difference
HELOC: A home equity line of credit’s interest rate may vary and therefore your monthly payments on a home equity line of credit may change over time. With a HELOC, disbursement of funds is made as you need them, and repayment is interest-only during the draw period; you repay the principal and any remaining interest afterward.
Home Equity Loan: With a home equity loan your interest rate is fixed and therefore your monthly payments will be the same each month. With a home equity loan, disbursement of funds is an upfront lump sum and repayment starts as soon as the loan is disbursed.
Pros and Cons
Home Equity Line of Credit (HELOC)
Pros:
- You only borrow as much money as you need
- Flexible repayment
- Tax deduction
- May come with little to no fees
Cons:
- Variable interest rates (changes based on market fluctuation)
- Not a set repayment plan (can be a pro for some)
- Maybe more debt to repay as it is a long-term credit option
- Could lose your home if you default on the HELOC
Home Equity Loan
Pros:
- Fixed interest rate
- You borrow a lump sum to use for nearly anything
- Little to no fees
- Tax deductible
- Set repayment plan (could be a con for some)
Cons:
- Best terms go to those with a good credit score
- Need a lot of home equity
- If property values decline, you owe more than your home is worth
- Could lose your home if you default on the loan
As you can see, a home equity loan and home equity line of credit are fantastic options for homeowners. Now that you know the benefits and main differences, which is best for you? These loans are a great source of value to access cash for renovations, large purchases, home remodel projects, college tuition, a new vehicle, or nearly any other need. Visit our website to learn more or stop in to talk with a lender!
Peoples Bank & Trust Co.
Member FDIC
Equal Housing Lender
NMLS# 407724