Your home is an asset, and its value can help you reach other financial goals sooner. A Home Equity Line of Credit (HELOC) and a Home Equity Loan (HELOAN) are both forms of borrowing that use the equity in your home as collateral.
You can use a HELOC and HELOAN for home renovations, education expenses, debt consolidation, large purchases, unexpected expenses, and more. Both HELOCs and HELOANs are typically in the second lien position, which means they are behind an existing first mortgage and allow you to use the equity in your home without impacting that mortgage’s rate. So, with a HELOC or HELOAN, you are able to keep your existing low rate on your first mortgage while still tapping into your home’s equity for additional funds.
While HELOCs and HELOANs do share these key similarities, they also have some important differences. Understanding these differences can help you choose the option that will make the most sense for you, your goals, and your finances.
HELOCs and HELOANs Are Structured Differently
While HELOCs and HELOANs are both borrowing products that leverage your home’s equity, they function differently.
A HELOC is an open-end revolving line of credit, similar to a credit card. You're given a credit limit, and you can borrow against it as needed. You only pay interest on the amount you borrow (not your limit), and you can borrow multiple times during the length of the draw period of the HELOC.
A HELOAN functions more like a typical loan, also known as a closed end loan. With a HELOAN, you will receive the entire loan amount upfront in one lump sum and repay it in fixed monthly installments over a specified amount of time.
HELOANs Have Fixed Interest Rates
HELOANs typically have a set interest rate, which means you will pay the same interest rate throughout the term of your loan. This has many benefits—you can lock in a great rate that will not be impacted if the market changes. You will also have a stable and predictable repayment plan that you can budget for in the future.
A HELOC usually has a variable interest rate, which means it can change based on market conditions. That means your monthly payment can change depending on the rate and outstanding balance. You will be notified in advance if there are any changes to your HELOC interest rate.
HELOCs Have More Flexible Access to Funds
A HELOAN gives you a one-time lump sum for your loan, and you start making fixed monthly payments immediately. For this reason, a HELOAN is often used for one-time expenses like home renovations, medical bills, or debt consolidation.
A HELOC allows you to withdraw and repay funds repeatedly within the HELOC’s draw period. A standard HELOC draw period is usually between 5 and 10 years. After the draw period ends, you will enter the repayment period, which is the additional time you have to repay any outstanding balance on the HELOC. This is why HELOCs are most often used for ongoing expenses, home improvements, or projects where the total cost is uncertain.
Repayment Terms Are Different
A HELOC has two phases—the draw period and the repayment period. During the draw period, you may make principal and interest payments or interest-only payments, depending on the product you choose. After the draw period ends—and you can no longer take out additional funds from the HELOC—you enter the repayment period. During the repayment period, which may last an additional 10 to 15 years, you will continue to repay the balance of your HELOC and any associated interest.
With a HELOAN, because you are provided with the full loan amount upfront, you must make consistent monthly payments that include both the principal and interest for the life of the loan.
Both HELOCs and HELOANs involve using the equity in your home, so the choice between them depends most on your financial goals, spending habits, and preferences for interest rate stability.
Credit Union 1 members have access to competitive rates and expert team members to help you choose the product that is right for you. You can open a HELOC or HELOAN online, in person at your local branch, and over the phone.
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