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Home Equity Loan or HELOC: What’s the Difference?

What you'll learn: The difference between a home equity loan and a HELOC and which is right for you

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Home Equity Loan or HELOC: What’s the Difference?

HELOC stands for “Home Equity Line of Credit.” A HELOC is a revolving line of credit based upon the equity you have in your home. You don't usually access the funds all at once as you might with a typical loan and can use the funds much like you'd use a credit card.

A home equity loan is a loan for a fixed amount of money that you access all at once, usually with a fixed interest rate. You secure this loan type through the equity in your home.

What are the similarities between a home equity loan and a HELOC?

These two types of borrowing are similar in that both a HELOC and a home equity loan use your home as collateral. If you have built up enough equity in your home and have a good credit, you can leverage either of these loan options. You will usually get a lower rate compared to other types of loans because you are using your home as collateral.

What are the differences between a HELOC and a home equity loan?

While a home equity and a HELOC may sound very similar, they have more differences than similarities. They differ in:

  1. How you receive your funds. With a home equity loan, you receive your funds all at once. With a HELOC, you can access the funds when you need them over time.
  2. The kind of interest rate you’ll get. With a home equity loan, you typically have a fixed interest rate over the life of the loan. With a HELOC, you’ll have a variable rate that can change up or down depending on the market.
  3. How you’ll repay your loan. Home equity loans are like a mortgage in that they need to be repaid over a set period of time with a defined payment schedule. With a HELOC, once you start to access your available funds, you only need to pay the minimum payment every month until after the draw period is complete. At that time, you may be required to pay the balance all at once or you may be allowed to repay it over a specified time period. This means that if cash flow is an issue for you, a HELOC may allow you to have lower monthly payments.

What is better — a home equity loan or a HELOC?

As you can imagine, the answer really depends on why you need to access the funds and how quickly you need to access them. You’ll need to consider how you’ll use the funds, and what is better for you in terms of the repayment. Here’s a great example of how each loan might be used with home improvements:

  • Say you want to put an addition on your home or upgrade your kitchen. If you have a contractor who will be managing the job, you know what the costs will be and how quickly you’ll need the funds. Therefore, a home equity loan might be the better choice, because you will have a fixed payment every month, and you’ll have access to all the needed funds up front.
  • Say instead you want to upgrade your home over time. Perhaps you’re a do-it-yourself type of person or would rather upgrade part of the home this year, see how things go and maybe upgrade more a few years down the road. With this example, a HELOC is likely a better choice because you don’t need the funds all at once and may change your mind on upgrades in the future.

As you can see, understanding how you’ll use the funds, how quickly you need them, and what your repayment comfort level is will help determine which loan option is right for you.

To learn more about HELOCs or home equity loans, contact PenFed:

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