What’s the Difference? HELOC vs. Home Equity Loan
The main difference between a HELOC and a home equity loan is that a HELOC is a line of credit, while a home equity loan is a lump sum loan. With a HELOC, you can borrow funds as needed up to your credit limit and pay them back as you go. With a home equity loan, you receive a lump sum of money and must repay it with interest over a fixed term.
Both home equity loans and home equity lines of credit are loans that allow a homeowner to borrow money based on the value of their home minus the amount of mortgage left to pay.
Home equity loans are typically offered in one lump sum, with a fixed interest rate and a repayment period. This type of loan is best for those who need a large sum of money for a one-time purchase or expense.
Home equity lines of credit are revolving credit lines, much like a credit card, with a variable interest rate. This type of loan is best for those who need access to money over a period, such as for home improvement projects or other large expenses.
Home equity loans have fixed interest rates. HELOCs have variable interest rates.
Home equity loans generally have a fixed interest rate and a fixed repayment period. This means that your monthly payment will remain the same for the full term of the loan. Home equity loans are typically used for large purchases such as home renovations, debt consolidation, or college tuition. A home equity line of credit (HELOC) is a revolving line of credit secured by the equity in your home.
A HELOC typically has a variable interest rate that is tied to an index such as the prime rate.
The interest rate on a HELOC is usually higher than the rate on a home equity loan. The HELOC is typically used for short-term financing needs and is a flexible loan option.
The repayment term for a home equity loan is typically 5 to 15 years, and the repayment term for a HELOC is typically 5 to 10 years, with the option of a draw
period of up to 20 years.
Monthly payments on a home equity loan stay the same, whereas HELOC monthly payments can change.
With a home equity loan, you borrow a lump sum of money and make fixed monthly payments over a set period of time. The interest rate is usually fixed, so you know exactly how much you’ll pay each month.
With a home equity line of credit (HELOC), you borrow money as needed and make payments on the amount you draw. The interest rate is usually variable, which means your monthly payments can change.
Depending on a homeowner’s circumstances, one
may be a better option than the other.