Home Equity Loan vs. Line of Credit

The Differences between a Home Equity Loan and a Home Equity Line of Credit

Home Equity Loan vs. Line of Credit

Posted on Sep 10, 2020

Both home equity loans and home equity lines of credit (HELOC) are ways to borrow money from the value you’ve accumulated in your house or property. But there are a few differences in how they function and how you might want to use them. 

When you get the money is different

The first big difference between home equity loans and HELOCs is when you get the money. Home Equity Loans function like a traditional loan and HELOCs function more like a credit card.

Home Equity Loans provide a lump sum amount at the start of the loan. With a HELOC you are approved for a maximum amount and can borrow what you need as you need it.

The interest and repayment structures are different

Home Equity Loans are considered fixed-rate loans. With fixed-rate loans you can expect the same monthly payment for the entire life of the loan. It won’t change over time. Additionally, because you receive the money upfront, you’ll make payments on the full balance as soon as repayment begins.

Conversely, HELOCs have a variable rate. That means your payments may go up or down over time. Additionally, HELOCs have a longer draw period than traditional loans. You’ll be approved for a maximum amount and can use up to that amount during the draw period. As you make payments on what you’ve used, the credit revolves and you can use it again. After the draw period the remaining interest and principal are due.

Which one is better?

To determine which equity product makes the most sense for you, consider:

How you’ll use the money. When you need the full amount up front, a Home Equity Loan makes more sense. If, however, you need more flexibility or continual use, a HELOC is likely the better option. 

Repayment capacity. You’ll want to factor your payments into your decision. If you have a lot of monthly obligations or have an unreliable income, you may prefer the predictability of consistent payments a loan offers.

Home Equity Loan vs. Line of Credit Chart

Next steps

If you’re ready for a Home Equity Loan or Home Equity Line of Credit you can apply online or visit one of our locations.

Remember to ask your bank or lender if there are any special promotions or rates available.