A Home Equity Line of Credit (HELOC) and a Home Equity Loan (HELOAN) are both financial products that allow homeowners to leverage the equity they have built up in their homes. However, they work differently and have distinct features:
- Home Equity Line of Credit (HELOC):
- A HELOC is a revolving line of credit that is secured by the equity in your home. Here’s how it works:
- Access to Funds: With a HELOC, you are granted access to a line of credit with a maximum limit, which is typically based on a percentage of your home’s appraised value minus any outstanding mortgage balance.
- Draw Period: During the “draw period” (usually 5 to 10 years), you can borrow funds from the line of credit as needed, similar to a credit card. You can use the funds for various purposes, such as home improvements, debt consolidation, or other expenses.
- Interest: You are only required to pay interest on the amount you borrow, not the entire credit limit. The interest rate is often variable and may be tied to a benchmark like the prime rate.
- Repayment: After the draw period ends, you enter the “repayment period” (typically 10 to 20 years). During this phase, you can no longer borrow funds, and you must repay the outstanding balance, which includes both principal and interest.
Flexibility: HELOCs offer flexibility in terms of when and how much you borrow, and you can repay and reuse the funds during the draw period.
2. Home Equity Loan (HELOAN):
- A HELOAN, also known as a “home equity loan” or “second mortgage,” is a lump-sum loan secured by your home’s equity. Here’s how it works:
- Lump-Sum Payment: When you take out a HELOAN, you receive a one-time, lump-sum payment for the approved loan amount.
- Fixed Interest Rate: HELOANs typically have fixed interest rates, meaning your monthly payments remain consistent throughout the loan term.
- Repayment: You start making regular monthly payments immediately, including both principal and interest. The loan term is predetermined, usually ranging from 5 to 30 years.
- Purpose: HELOANs are often used for specific purposes, such as funding a major home renovation, consolidating high-interest debt, or covering a large expense.
- Key Differences:
- Access to Funds: HELOCs provide a revolving line of credit, while HELOANs offer a one-time lump sum.
- Interest Rates: HELOCs often have variable interest rates, while HELOANs typically have fixed rates.
- Repayment: HELOCs have a draw period followed by a repayment period, while HELOANs have fixed monthly payments from the start.
Flexibility: HELOCs offer ongoing flexibility to borrow, repay, and reuse funds during the draw period. HELOANs provide a fixed amount upfront.
Choosing between a HELOC and a HELOAN depends on your financial goals, needs, and preferences. A HELOC may be more suitable for those who want ongoing access to funds, while a HELOAN may be preferable if you need a lump sum for a specific purpose and prefer stable, fixed payments. Additionally, it’s important to consider your ability to manage repayments and the impact on your home equity when deciding which option is right for you. Give us a call so we can help you make the right choice.