Home Equity Loan vs. HELOC

When you need cash to pay for home improvements or other large expenses, your best option might be tapping into your home’s value by taking out a home equity loan or line of credit. So, what’s the difference, and which one is right for you?

Home Equity Loan

A home equity loan is ideal when you need a specific amount of money for a one-time expense. It typically includes a fixed interest rate and standard monthly payments, making the payback predictable and manageable. Once you receive the lump sum, the payback begins immediately, and the account is closed after you pay it off.

A home equity loan might work for you if you are using the funds to pay for something with a known cost, like a specific home renovation project, a new car, a vacation, or even to pay off high-interest debt.

Home Equity Line of Credit

Like a home equity loan, a HELOC also borrows against the value of your home. But instead of a fixed interest rate with predicable monthly payments, a HELOC functions like a credit card. You have access to a credit limit, and you only borrow and pay interest on the amount you actually use. A HELOC might include a low interest rate for an introductory period, then it typically converts to a variable rate that fluctuates a bit over time.

Paying back a HELOC works differently than paying back a loan. With a HELOC, you’ll have a draw period of 10 years in which you are able to borrow money and may only be required to pay the interest. After this draw period ends, you move into the repayment period in which you can no longer borrow funds and are required to pay back the principal and interest. The repayment period may last anywhere from 10 to 20 years, depending on the lender.

A HELOC might be right for you if you anticipate ongoing, unpredictable expenses like continuous home remodeling, medical bills or emergency expenses.

Questions?

No matter your needs, a City banker can help you determine and apply for the best product for your individual situation. Click one of the buttons below to learn more about City’s options or to contact your local branch for more info.