Key Differences Between Home Equity Loans and HELOCs

Before diving into the detailed comparisons between home equity loans and HELOClet’s define the two terms.

A home equity loan is a second mortgage that is similar to a primary mortgage and is repaid in monthly installments. Once a homeowner is approved for a home equity loan, they receive their money in one lump sum payment. Then the owner is responsible for repaying the loan on a monthly basis with additional interest over a set number of years, depending on the term of the loan.

On the other hand, a HELOC is a revolving line of credit determined by a percentage of the equity in your home. Instead of receiving a lump sum of money, a HELOC gives homeowners the ability to borrow up to around 75% – 85% of the value of their home. Compared to a home equity loan, HELOCs generally have a lower interest rate and the interest may be tax deductible. Homeowners can take out a HELOC whether or not their mortgage has been paid off.

Overall, the main differences between a home equity loan and a HELOC are how homeowners receive their funds, varying interest rates, and repayment options. Let’s explain these key distinctions in more detail.

Access to funds

One of the main differences between home equity loans and HELOCs is how homeowners receive their funds. For example, home equity loans allow homeowners to access their borrowed funds in an upfront lump sum. On the other hand, HELOCs allow homeowners to tap into borrowed money as they need it.

Fixed vs. Variable interest rates

Interest rates are another key distinction between home equity loans and HELOCs. For example, a home loan has a fixed interest rate and a HELOC has a variable interest rate.

A fixed interest rate means that the interest rate on the loan remains the same throughout the life of the loan and does not fluctuate due to economic conditions. However, a variable interest rate fluctuates over the life of the loan depending on the economy and its influences.

This means that when a homeowner takes out a home equity loan, their interest rate payments stay constant from month to month, but when a homeowner uses a HELOC, their interest rate payments can change. each month.

Also, when comparing interest rates between home equity loans and HELOCs, HELOCs tend to have slightly lower interest rates than home equity loans.

Refund Options

Finally, another difference between home equity loans and HELOCs are the repayment options. For example, homeowners who take out home equity loans must make monthly payments on the loan. The amount due each month as well as the repayment period of the loan may vary depending on the terms of the loan which may be affected by the amount of money borrowed at a given interest rate.

HELOC repayment options differ significantly from the monthly payment on a home equity loan. For example, paying off a HELOC can be compared to a credit card, which means a homeowner can borrow up to a certain amount for the term of the loan, carry over a balance from month to month, and make payments loan minimums. Typically, HELOCs also have a “drawdown period,” when a homeowner’s monthly payments will only be for loan interest. It can last around 5-10 years before a repayment period of around 10-20 years begins. During this time, a homeowner will make regular loan payments with additional interest until it is paid off. The amount of money a homeowner can get with a HELOC depends on many factors, including the value of the home, how much you owe, and your credit history.

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