If you’re looking to tap into your home’s equity, you have two great choices in a Home Equity Line of Credit (HELOC) and a Home Equity Loan. Let’s take a look at these two products, the key features of each choice and factors to consider before making a decision on which to choose.

How are HELOCs and home equity loans used?

Although they are structured differently, HELOCs and home equity loans are generally used for similar purposes. Here are some of the most common uses for these home value-backed loans:

• Home renovations. Many homeowners use these funds to make improvements that will increase the home’s value.
• Debt consolidation. Homeowners carrying large amounts of high-interest debt may choose to consolidate those debts into a single lower-interest line of credit or loan.
• Emergency expenses. Both products provide access to funds in a pinch, whether for medical emergencies or high-cost unexpected repairs.
• Large purchases. From buying a new vehicle to funding a significant family event, these loans offer an alternative to traditional personal loans.
• Business launch or growth. Many entrepreneurs will use these funds to launch a new business or grow an existing corporation.

It’s important to note that there are no restrictions on how you use your HELOC or home equity loan. However, it’s best to use discretion when choosing to use your home as collateral on a loan product because it means risking the loss of your home.

What Is a Home Equity Line of Credit (HELOC)?

A HELOC features a revolving line of credit that the homeowner can draw from as needed. Similar to a credit card, the borrower can use funds up to a predetermined limit and repay them over time, only paying interest on the borrowed amount until the end of the draw period. Following the draw period, required repayment of principal (in addition to interest) commences.

Key features of HELOCs:

• Revolving credit. Homeowners have access to a line of credit that can be drawn upon repeatedly during the “draw period,” which tends to last five to 10 years.
• Variable interest rate. HELOCs often have variable rates, which means the interest rate can change based on market conditions. Consequently, monthly payments can fluctuate throughout the HELOC term.
• Flexible repayment. Borrowers have the flexibility to pay off the balance and then re-borrow funds during the draw period.
• Interest-only initial payments. Many HELOCs allow interest-only payments during the draw period, making the initial required payments lower. Unless you make more than the minimum due, the principal balance remains unchanged until your post-draw period begins, in which significantly higher payments are required.

What is a home equity loan?

A home equity loan is a fixed loan amount that is borrowed against your home’s equity. Your home’s equity is calculated as the difference between the current market value of the home and the outstanding balance on the mortgage. Because your home secures the loan, interest rates are generally lower compared to unsecured loans.

Key features of home equity loans:

• Lump sum disbursement. Borrowers receive the full loan amount all at once.
• Fixed interest rate. Most home equity loans come with a fixed interest rate, which means the rate and monthly payments remain constant throughout the life of the loan.
• Set repayment terms. The loan is repaid over a predetermined period, which typically ranges from five to 30 years.
• Predictable payments. With a fixed interest rate and set repayment plan, borrowers know exactly how much they’ll pay throughout the life of the loan, making budgeting for the loan easy.

Key differences between HELOCs and home equity loans

Understanding the differences between these two products is crucial for deciding which is right for you.

1. Disbursement of funds:

• HELOCs offer a revolving line of credit that can be drawn upon as needed. This makes them ideal for homeowners who are unsure of exactly how much they need to borrow or may need different sums at differing times.
• Home equity loans provide a one-time lump sum, making them the perfect choice for borrowers who know exactly how much they want to borrow and need the funds immediately.

2. Interest rate structure:

• HELOCs generally have a variable interest rate, which can fluctuate with market conditions. This can mean having a lower monthly payment at times during the life of the HELOC, but it can lead to rising payments as well. This factor makes it more challenging to budget for monthly payments.
• Home equity loans typically come with a fixed interest rate, which means there are no surprises throughout the life of the loan. This can also mean significant savings for the borrower if interest rates rise, with the inverse occurring if rates drop.

3. Repayment terms:

• HELOCs feature flexible payment terms during the draw period; however, payments may vary once principal repayments begin.
• Home equity loans have a fixed repayment period with predictable monthly payments.

If you’re still unsure whether to take out a HELOC or a home equity loan, we can help! Whichever home equity product you choose, at Forrit Credit Union, you’re assured favorable interest rates, easy eligibility and the personalized service you’ve come to expect at Forrit Credit Union.