Home Equity Loan vs Home Equity Line of Credit
Owning a home can give you one huge benefit: access to equity once you’ve paid enough of the principal. But how should you access your equity? It can be hard to choose between the two main types of equity-based financial products. Home equity loans (HEL) and home equity lines of credit (HELOCs) both have value. And the home equity loan vs. home equity line of credit debate has been around for a while. Both types use your home as collateral. But they’re different in almost all other respects. Let’s discover how.
What is a HEL?
A home equity loan is like a second mortgage, taken out against the amount of principal you’ve already paid off. Once in place, you get a payment for the total amount. It’s different from a HELOC in that respect. Over the span of the term (usually 10 years), you pay off the loan. Here are the details.
- Lump sum payment
- Fixed interest rate
- Amortized interest
- Closing costs
- Use your home as collateral
Because interest for a HEL is fixed, you’ll usually have a higher rate than you’d find for a HELOC. If you simply need a loan and have some equity, the HEL is a pretty good option.
What is a HELOC?
A home equity line of credit is a very flexible financial vehicle. It can be set up like a second mortgage, giving you a line of credit to access anytime. Or – and this is where possibilities expand – it can be set up in place of an already-existing mortgage.
One thing a HELOC has that a HEL won’t be able to offer? A “draw period.” Where HELs are set up as a lump sum payment, HELOCs feature:
- Monthly interest-only payments (usually)
- A draw period of 10-15 years, depending
- A repayment period of 10-15 years following the draw period
- Variable interest rate
- Caps on interest rate to mitigate extreme fluctuation
- Means of accessing credit through the HELOC, such as access cards or checks
- Other details depending on the lending bank
If you need access to cash reserves, a HELOC might be good for you.
But there’s more. If you are intrigued by the possibility of replacing your mortgage with a HELOC – and paying it off quickly by using the strength of your entire income through direct deposit – a first-lien HELOC may be just what you need.
Rather than using it has simple access to cash whenever you want, you can use it as your operating account in place of your checking account. And you may be able to pay it off in a fraction of the time it would take to pay off your mortgage. Think about it. It may be worth your time to do some more research.
Home Equity Loan vs Home Equity Line of Credit: Which option is right for you?
Only you can settle the question of home equity loan vs home equity line of credit.
Do you simply want a loan? You can get either a HEL or a HELOC for that – but not a first-lien HELOC.
Do you want to put your entire income to work paying off your home debt? You can only use a first-lien HELOC for that.
You can take this simple survey to find out if you’re a good candidate for a HELOC.