Now You Know The Difference Between a HELOC and a Home Equity Loan

Now You Know The Difference Between a HELOC and a Home Equity Loan

Your home is likely one of your most valuable financial assets. In certain situations, tapping into your home’s equity could be the smartest solution — whether you’re paying off debt, funding a renovation, or covering unexpected expenses.

There are two options that exist: home equity loans and Home Equity Lines of Credit (HELOCs). Both may seem similar to each other on paper. However, it’s the way they function that distinguishes themselves from one another. You may want to consider which option is better suited for your financial goals and needs. 

What Is Home Equity?

To start, let’s discuss what “home equity” is. This is defined as the difference between your home’s market value and the remaining balance on your current mortgage. Let’s say, for instance, that your home is worth $250,000 and you currently owe $150,000. That means you have $100,000 in equity. 

You can potentially borrow against that equity which is about 80 to 90 percent of the appraised value. Borrowing will depend on certain factors like your income, credit profile, and what your lender’s guidelines are like.

How A Home Equity Loan Works

A home equity loan (or a second mortgage as it can be called) allows you to borrow a fixed amount of money. However, the home’s equity is being used as collateral. This kind of loan is paid in a lump sum with fixed terms. So you receive the full amount upfront at a fixed interest rate that stays in place for the life of the loan. Your repayment schedule allows you to repay the loan anywhere from 5 to 30 years including payments on the monthly principal and interest.

A home equity loan is best suited for you if there are one-time major expenses that you need to get out of the way. Plus, they are great for those who want to consolidate their debt with a payment plan that is clear and simple. Finally, it’s a good fit if you want monthly payments that are fixed and predictable, not changing from month to month.

How A HELOC Works

A HELOC is more like a credit card. You are approved for a revolving line of credit that is based on the equity of your home. Unlike home equity loans, you are not given the entire loan in a lump sum. Instead, you are provided with the opportunity to borrow as much or as little as you need during the draw period. In other words, you can borrow money as needed up to the limit that you have been approved for.

It is important to note that with variable interest rates, you need to be aware of any changes as they can affect your payment plans moving forward.

On top of this, you have a 10-year draw period to work with. Once the period is complete, it soon follows a 10 to 20 year repayment period. If you are dealing with unpredictable expenses or ongoing ones and don’t mind borrowing while the interest rates vary, then this may be the best option for you.

Side-by-Side Comparison: HELOC vs. Home Equity Loan

By looking at this comparison chart, take a moment to determine which option may be best suited for you so far. Next, we will be taking a look at the pros and cons of each option.

Pros and Cons of HELOC vs Home Equity Loan

Pros of Home Equity Loans:

• Stable interest rates
• Predictable payments
• Good if you are disciplined and follow a repayment schedule

Cons of a Home Equity Loans:

• Interest begins to accrue immediately on the entire amount
• Less flexibility as you are given the entire equity in a lump sum

HELOC Pros:

• Only borrow the amount you need
• Good for long-term projects or fluctuating expenses
• Interest-only payments while draw period is still active

HELOC Cons:

• There is potential for interest rate increases as they are variable
• Payments can increase after the end of the draw period
• Difficult to manage if you are an undisciplined borrower

This can give you a more informative idea of which option to choose from. Are you disciplined or undisciplined when it comes to borrowing? Are you looking for something more predictable in terms of payment? These are some of the things to consider before deciding whether a Home Equity Loan or a HELOC is best suited for your financial needs.

Is The Application Process Different?

HELOC or home equity loans follow a similar application process. However, there are some requirements you’ll need to fulfill regardless. This includes but is not limited to providing proof of income and employment, sufficient equity in your home, having the home appraised, and undergoing a credit check. Once you have followed through these requirements in the application process, you may be approved or denied. However, it is important to consult with your bank before making a final decision moving forward.

Final Thoughts

Both home equity loans and HELOCs can be beneficial when it comes to your financial needs. A home equity loan can be better for large, one-off expenses. Yet, ongoing expenses can be paid off with a HELOC. Either way, it is important to make sure that you keep up with regular payments so you don’t put yourself in a financial situation that can be difficult to get out of. Take your time to choose the best option and talk to your bank today about your planned steps with a home equity loan or HELOC.  

Our team can help you understand your options and determine if refinancing is the right move for you.

Schedule a Consultation or Start Your Application Online

The Harvard State Bank is here to help make homeownership a seamless process. Whether you’re a first-time homebuyer or looking to refinance, we’ll help you find the loan that fits your needs. Our local specialists and lending options ensure you have the expert support you need to realize your dreams.

Begin your home loan application online , or speak with one of our mortgage lenders at 815-943-4400 for guidance every step of the way.