Home Equity Loan Vs. HELOC: Which Is Right For You?

Home equity in the United States has reached an all-time high – the average mortgage holder owns a staggering $185,000 in accessible home equity, Investopedia reveals. Home equity loans and home equity lines of credit (HELOCs) both allow you to tap into the equity you’ve built up in your home, and access money to use as needed – whether it’s for a home improvement, renovation, or emergency repair, for example. Since these loans use your home as collateral – meaning you’re at risk of losing your home if you fail to make repayments – they typically offer better interest terms than unsecured loans, including personal loans, and credit cards.

Making the right choice 

When it comes to choosing between a home equity loan and a HELOC, it’s important to first be clear on your individual needs: what do you need the loan for, and how much does this require? If, for example, you’d prefer a structured loan with a set clear monthly payment and repayment schedule, you’ll be suited to a home equity loan. On the other hand, if you’re not sure exactly how much money you need – or, if you’d simply prefer a more flexible loan – a HELOC is likely a better choice. You’ll also need to take terms and potential fees into account – compare and contrast options from different lenders to find the best deal. It’s also important to understand homeowner loan interest rates. A fixed interest rate means the interest rate remains the same throughout the borrowing period, while a variable rate means the amount of interest you pay fluctuates over time.  

Home equity loan 

A home equity loan essentially lets you borrow a lump sum against the equity in your home. In most cases, you’ll be able to borrow between 80%-85% of your available equity. These loans have a fixed interest rate, which makes staying on top of your budget easier to manage as you can expect to make set payments each month. The repayment period also spans between five and thirty years. To qualify for this loan, you’ll need to have enough home equity built up (usually between 15%-20%). 

Home equity line of credit (HELOC) 

A home equity line of credit (HELOC) also lets you tap into your home’s equity. However, in contrast to a home equity loan, a HELOC lets you take out money as and when you need it over a set timeframe (similar to the way a credit card works). You’ll only be able to take out money during the draw period, which usually lasts a decade. After that, you’ll enter the repayment phase during which you’ll need to repay the money borrowed, along with interest (this usually lasts up to twenty years). Although HELOC interest rates usually start off lower than home equity loan interest rates, they’re variable, which means they can go up or down each month.

A home equity loan or HELOC can be a useful way of tapping into your home’s equity and using the funds as needed. By taking the time to understand the pros and cons of both loans, you’ll be able to make the right choice for your needs and financial situation.