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HELOCs vs. home equity loans: What's the difference?

A HELOC and home equity loan both have unique benefits that may appeal to homeowners. Getty Images

The combination of high inflation and high interest rates is making it tough for many people to stay on budget and/or pay off debt. Your regular expenses like for food and transportation might be up, while at the same time, financing costs also tend to be higher than they were a year or so ago.

If you have credit card debt, for example, your annual percentage rate (APR) has likely gone up recently, making it more expensive to pay off your balance. Or, if you're looking for financing such as to make home renovations, you might have noticed that estimated loan payments are higher than what they would have been last year.

To offset rising costs for general expenses as well as debt payments, you might be looking to tap into your home equity, which, on the fortunate side of rising prices, may have also gone up recently. Two popular ways to access your home equity include taking out a home equity loan or opening a home equity line of credit (HELOC).

If you think you could benefit from going this route then start exploring your options here now.

What is a HELOC?

A HELOC is a revolving line of credit based on the equity in your home. In other words, rather than getting a lump sum like you would with a typical loan, you get access to credit that you can draw from as needed, similar to how you can use a credit card as needed, up to a certain limit. Like credit cards, HELOCs also generally have variable interest rates.

What is a home equity loan?

A home equity loan is also based on the equity you have in your home, but it's a lump sum loan with a fixed interest rate. A home equity loan is often called a second mortgage, and it typically functions similarly to a regular mortgage.

Differences between HELOCs and home equity loans

While the names sound alike and both are based on borrowing against your home equity, there are several differences between HELOCs and home equity loans, such as the following:

  • Lump sum vs. credit line: While you might have the same access to funds with either a home equity loan or HELOC, the way you borrow it differs. With a home equity loan, you borrow a lump sum of money, which could be a significant amount. With a HELOC, you have a credit line that you can generally borrow from a little bit at a time, instead of all at once, if you want.
  • Interest rates: One of the biggest differences between a home equity loan and a HELOC is the interest rate structure. Generally, home equity loans have fixed interest rates, and HELOCs have variable interest rates.
  • Repayment terms: HELOCs typically have a period where you can draw from the line of credit, often around 10 years. During this time you can borrow money and make repayments along the way to refresh your credit limit. However, many HELOCs allow for interest-only payments during the draw period. After the draw period comes a repayment period, where you might have to repay the loan all at once or in installments, depending on the loan terms. In contrast, home equity loans work more like a typical mortgage, where you have regular repayment requirements after you take the loan.

Not sure which one is right for you? Check your eligibility and local offers online now and find out!

Similarities between HELOCs and home equity loans

While home equity loans and HELOCs function differently in several ways, they both provide ways to borrow against your home equity. With both types of financing, you'd be using your home as collateral, so you want to be sure you can pay back what you borrow so you don't end up losing your home.

With both HELOCs and home equity loans, you typically can have a combined loan-to-value (CLTV) ratio of up to 85%. That means any existing debt on your home, like your first mortgage, plus the HELOC or home equity loan can equal up to 85% of your home's appraised value. 

The exact amounts might be higher or lower though based on the lender and your personal circumstances, but many lenders have the same limits for both HELOCs and home equity loans.

How you can determine which option is best

Choosing between a home equity loan or HELOC—or other types of borrowing, like a cash-out refinance—depends on several factors such as your current debt situation, your risk tolerance and the amount of money you want to borrow.

For example, if you're worried about interest rates going up in the future, you might prefer to get a fixed-rate home equity loan now. But if you don't need to borrow as much right away, you might prefer the flexibility of a HELOC, even though that could mean future borrowing costs are higher.

Either way, taking out these types of loans or credit lines can be a big decision. Make sure you do your research, such as by comparing lenders and perhaps speaking with a trusted advisor to figure out what makes the most sense for your circumstances.

Crunch the numbers here to see which option is best for your circumstances or check the table below to learn more.

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