What are the Differences Between a Home Equity Line of Credit (HELOC) and a Home Equity Loan?

When it comes to taking out a loan to leverage the equity in your home, homeowners have two options to consider: a Home Equity Line of Credit (HELOC) or a Home Equity Loan. Both of these options can help you access the equity you have built up in your home, but they do have differences that you should understand before deciding which is right for you. 

Nearly 3 in 4 Americans think that the economy is headed in the wrong direction and 80% don’t expect the economy to improve at all in 2023. In these uncertain economic times, it is important to make sure that you are making the right financial decisions especially when it comes to leveraging the equity in your home. 

What is a Home Equity Line of Credit (HELOC)? 

With a Home Equity Line of Credit (HELOC), you are borrowing a line of credit that is secured by the equity in your home. The loan is structured in such a way that you can draw on the line of credit up to a maximum specified amount, and you will only be responsible for the interest on the amount you’ve borrowed. The loan is typically a variable rate loan, and the interest rate will fluctuate with the market. 

Pros of an HELOC :

1. Flexibility in how you use the loan: With a HELOC, you can use the money for a variety of needs, including renovations, vacations, educational expenses and more. 

2. Pay off the loan early without any pre-payment penalties: With a HELOC, you can pay off the loan early without any additional charges. 

3. Interest rate is variable, so you can take advantage of lower rates: The interest rate on a HELOC can fluctuate depending on the market, so you may be able to take advantage of lower rates when they occur. 

Cons of an HELOC :

1. Interest rate is variable, so it can increase over time: The interest rate on a HELOC can increase over time, making it more expensive to borrow money. 

2. Loan limits are usually lower than a Home Equity Loan: HELOCs typically have lower loan limits than Home Equity Loans, so you may not be able to borrow as much money. 

3. Not as tax-deductible as a Home Equity Loan: Interest paid on a HELOC may not be tax-deductible, whereas interest paid on a Home Equity Loan may be.

What is a Home Equity Loan? 

However, a Home Equity Loan is a lump sum of money that is secured by the equity in your home. The loan is a fixed rate loan, meaning the interest rate will remain the same throughout the life of the loan. The loan is typically used to pay for a one-time expense, such as a home improvement project or to consolidate debt.

A Home Equity Loan is a great option if you need a lump sum of money for a one-time expense. The interest rate is fixed, so you won’t have to worry about the rate increasing over time. The downside is that you will not be able to access additional funds without taking out a new loan. 

Pros of a Home Equity Loan: 

1. Get a lump sum of money for a one-time expense: This is beneficial if you need a large sum of money for a single expense, such as a home renovation, medical bills, tuition fees, or other large costs. 

2. Interest rate is fixed: Fixed rate loans provide more stability, as the interest rate will not change over time. This can be beneficial if you want to be able to plan your budget and know how much you will be paying each month. 

3. Tax deductible: Any interest you pay on the loan may be tax deductible, allowing you to lower your overall tax bill. 

Cons of a Home Equity Loan: 

1. Cannot access additional funds without taking out a new loan: If you need more money, you will have to take out another loan, which may be difficult to qualify for. 

2. Difficult to qualify for: Lenders may have stricter requirements for these types of loans, making it difficult to qualify. 

3. Higher interest rates than HELOCs: The interest rates on fixed rate loans could be higher than those of HELOCs, meaning you could end up paying more in the long-term.

Key Difference Between HELOC & Home Equity Loan 

When considering the differences between a Home Equity Line of Credit (HELOC) and a Home Equity Loan, it’s important to understand your financial goals and the purpose of the loan. A HELOC can provide you with flexibility in how you use the loan, but the interest rate is variable. While a Home Equity Loan is a great option if you need a lump sum of money for a one-time expense, you won’t be able to access additional funds without taking out a new loan.
With 73% of Americans experiencing stress and anxiety over money, it’s important to compare the terms of each loan and decide which one best fits your financial needs. Be sure to shop around for the best rates and terms and consult with trustworthy and educated lender or real estate agent before making a decision.