Home Equity Loans vs. Home Equity Line of Credit
Home equity loans and Home Equity Line of Credit (HELOC) are different ways to do the same thing—use the equity you have built up in your home to help pay for things you need today. Let’s break down home equity loans vs. HELOCs to see what might work best for you.
The differences explained
It’s no secret that home prices have gone up. As a homeowner, you may have equity built up in your home. If so, then both Home Equity Loans and HELOCs are viable options to pay for large purchases, such as home improvement, college tuition, or that vacation you’ve been dreaming of. Let’s take a look at how each option works and which loan type might best meet your financing needs.
What Is a Home Equity Loan?
Equity is the amount your property is currently worth, less the outstanding amount you still owe on your mortgage on the property. It’s the portion of your home’s value that belongs to you. If you have been paying down your home for a while and its value has appreciated, you may hold a significant amount of equity in your home.
A home equity loan allows you to tap this equity directly. Also known as a second mortgage, a home equity loan allows you to borrow an amount equal to a portion of this equity, using your home as collateral for the loan.
With a home equity loan:
- You receive the amount you borrow as a lump sum that you can use as you see fit
- You repay at a fixed rate for the term of the loan
- You continue to make repayments on the balance of your original mortgage
Home equity loans allow you to make a fixed payment for the full term of the loan, which can extend up to 30 years.
The main risks of a home equity loan are:
- If your home’s value falls, you might owe more than your equity is worth
- If you are unable to make payments on either loan, you are at risk of losing your home
What Is a HELOC?
A HELOC also allows you to borrow against the equity you have built up in your home, but the money is offered to you as a revolving line of credit. This means it works more like a credit card, where you can borrow smaller amounts of cash as you need up to the limit of the portion of your equity you were able to borrow against.
With a HELOC:
- You borrow small amounts up to a set limit for an agreed “draw” period
- You make minimum payments and pay interest only on what you have borrowed
- After the “draw” period ends you’re required to start paying the full balance of the loan
HELOCs allow you to borrow money as and when you need it and to repay only a minimal amount of what you have borrowed, often only the interest charged. Once the draw period ends you’ll need to repay the balance all at once, or over a period of up to 30 years or more.
While the variable rate might be fixed for the draw period, if rates rise, it may jump sharply at the end of the draw period. You may face “balloon” payments as well, to make sure you’re able to repay what you owe within the agreed term. Or you might incur prepayment penalties if you want to pay off the line of credit before the end of the term.
The main risks of a HELOC include:
- Payment shock when higher rates are applied at the end of the draw period
- Owing more than your equity is worth if your home’s value falls
- Losing your home if you’re unable to pay off either your line of credit or your mortgage
Why Borrow?
The big advantage of both home loans and HELOCs is that, because they are secured by your home, they offer very competitive rates compared with other forms of lending. This makes them a good source of money for those big projects you would like to get done. That said, the type of borrowing you choose depends on your specific situation.
Choose a Home Equity Loan If…
- You’re looking for a large lump sum for a one-time expense such as a wedding or a major home renovation project
- You’re happy to pay down a loan for a long period at a steady rate
Choose a HELOC If…
- You need easy access to money to pay for smaller expenses or emergencies
- You are able to make regular repayments to keep your balance in check
HELOCs offer low fees and interest rates and can be a good way to pay for necessary expenses that would overwhelm your credit cards, such as unforeseen medical bills or starting a small business. However, don’t be tempted by interest-only payments for the first few years. You must be able to keep your balance in check to avoid far higher costs down the line.
Click here to see how home equity loan and HELOC borrowing costs stack up.
Smart Home Equity Options With Argent Credit Union
At Argent Credit Union we offer our members flexible options for tapping into their home’s equity to pay for the things your family needs today.
Our home equity loans feature:
- Fixed-rate loans starting at $10,000
- Terms between 5 and 10 years
- Borrowing up to 90% of your home’s equity
Our HELOCs feature:
- Flexible loans starting at $10,000
- Borrowing up to 90% of your home’s equity
- Take out only what you need
- No closing costs*
Whatever your borrowing needs, Argent Credit Union is here to help you make the best decision based on your financial situation.
Click below to learn more about our home equity financing options.
*No closing costs. If you close your line of credit within thirty-six (36) months, you will be required to reimburse the Credit Union for closing costs paid on your behalf. These fees generally total between $400 and $1,000. If you ask, we will provide an itemization. Limited time offer.
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