Are you looking to tap into your home’s equity but unsure whether a HELOC vs. Home Equity Loan is right for you? Let’s break down these two options and see which one fits your financial needs.
Similarities Between HELOC and Home Equity Loan
Both a HELOC (Home Equity Line of Credit) and a Home Equity Loan let you borrow against your home’s value, but there’s more in common:
1. They’re Secured by Your Home
Both are loans against your home’s equity. That means if you have an existing mortgage, these usually act as “second mortgages,” adding another lien. So, keep in mind you’re pledging your home as collateral for these loans.
2. Interest Rates Are Higher than First Mortgages
While their rates are typically lower than credit cards, both HELOCs and Home Equity Loans usually have higher interest rates than primary mortgages. For example, you might see a first mortgage at 6.5%, while these might start closer to 8%. Still, for debt consolidation, they’re a smart move compared to keeping credit card debt.
3. Access to Larger Loan Amounts
Unlike many cash-out refinance options capped at 75% of your home’s value, a HELOC or Home Equity Loan may allow up to 85% or even 90% of your home’s value. This can mean more cash in your pocket if you need it.
Differences Between HELOC and Home Equity Loan
Now, let’s talk about what makes these two loans different, helping you decide which is the best fit for your goals.
1. Fixed vs. Adjustable Rates
- HELOC: Usually has an adjustable interest rate, which can fluctuate with the market. This means your payment can change over time.
- Home Equity Loan: Offers a fixed rate, so your payment stays the same from month to month.
Example: If you’re budgeting on a fixed income, a Home Equity Loan might offer more stability. But if you’re comfortable with variable rates, a HELOC could work.
2. Interest-Only Payments vs. Full Payments
- HELOC: Often starts with interest-only payments, which can keep monthly costs low. However, paying only the interest doesn’t reduce the balance.
- Home Equity Loan: Requires monthly payments on both principal and interest, meaning your balance goes down each month.
Example: With a HELOC, if you need to keep monthly payments low while you manage other expenses, the interest-only option is helpful. For those who want steady progress paying down debt, a Home Equity Loan may be better.
3. Open Line vs. Lump Sum
- HELOC: Works like a credit card. You’re approved for a limit (e.g., $50,000), and you can borrow, pay back, and re-borrow as needed.
- Home Equity Loan: Is a one-time loan with a set amount. You borrow it all upfront and repay it in fixed installments.
Example: Say you want flexibility to access cash over time for ongoing expenses or projects. A HELOC lets you borrow only what you need when you need it. On the other hand, if you need a single amount to cover one big expense, a Home Equity Loan may make more sense.
HELOC and Home Equity Loan vs. Cash-Out Refinance
You might wonder why not just go with a cash-out refinance instead. Here’s why HELOCs and Home Equity Loans can often be the smarter choice, especially in today’s market.
- Lower Interest Rate Overall: Keeping your original mortgage (likely at a lower rate) and adding one of these loans can cost less overall than refinancing everything at a higher rate.
- Flexibility in Payment Structure: Both options allow you to consolidate higher-interest debt, but they give you flexibility in repayment that a full cash-out refinance might not.
Example: Imagine you have a $100,000 mortgage at 4% and $20,000 in credit card debt. A HELOC or Home Equity Loan can help pay off that high-interest debt without touching your low-rate mortgage.
Which Option is Best for You?
Choosing between a HELOC and a Home Equity Loan comes down to your financial situation and preferences. Here are a few things to consider:
- Stability vs. Flexibility: If you prefer knowing exactly what you’ll pay each month, a Home Equity Loan with a fixed rate may be better. For more flexibility, go with a HELOC.
- Short-Term vs. Long-Term Needs: If you need ongoing access to cash, a HELOC’s revolving credit line may suit you. For one-time needs, a Home Equity Loan is often simpler.
Try Our HELOC Calculator
Still not sure? Use our HELOC Calculator to see your estimated payments based on different loan amounts and rates. It’s a quick, easy way to see which option works best for you.
Conclusion: Choose the Right Loan for You
HELOCs and Home Equity Loans both have advantages. Choose the one that gives you the peace of mind and flexibility you need. And remember, these loans can keep you from refinancing into higher mortgage rates while helping you tackle big expenses.
Contact us today to find out more about HELOC vs. Home Equity Loan: What’s the Best Choice for You?
Watch our most recent video for a side by side comparison of HELOC vs. Home Equity Loan
