Compare the Difference Between a HELOC and a Home Equity Loan

A home equity loan (HEL) and a home equity line of credit (HELOC) allow homeowners to tap into their home equity to receive extra cash. Equity is defined as the amount of money you’ve paid towards the value of your home. Homeowners can use the money from an HEL or HELOC in many ways, including to fund home improvements or to consolidate debt.

A Closer Look at a Home Equity Loan

A home equity loan is a one-time payment for homeowners who need a single lump sum of cash. An HEL has a fixed interest rate, meaning that the monthly payments remain the same for the entire loan term. Homeowners must repay the HEL in-full if they sell their home; therefore, you may not want to take out an HEL if you plan to move from your home in the near future.

To determine how much your home equity loan is worth, simply take the current market value of your home and subtract your current mortgage balance. For example, if $300,000 is current market value of home, subtract $200,000 which would be the current mortgage balance to get $100,000 in available home equity. Some mortgage lenders will not exceed a $500,000 home equity loan.

With a home equity loan, it’s important to not borrow more than you need, because you must pay interest on full home equity loan amount.

Home Equity Line of Credit Overview

If you’re a homeowner needing to borrow extra cash intermittently, multiple times over an extended time period,you may want to consider a home equity line of credit. A HELOC is like a credit card in that you can borrow money several times over the loan term, up to the maximum set limit.

Unlike a home equity loan, a HELOC has an adjustable interest rate that fluctuates with current market conditions. One good thing about a HELOC is that you only pay interest on the amount that you borrow  and not the total amount of the line of credit.

Should I Get a Home Equity Loan or a HELOC?

Before assessing whether to get a home equity loan or a HELOC, be sure that a second mortgage is an avenue you truly want to pursue. Taking out a home equity loan or HELOC means that you're leveraging your home for extra cash. If you do not to repay the loan, the bank could foreclose on your home to earn back what you borrowed. If, however, you have a stable source of income and a good debt repayment track record, a home equity loan or HELOC can be a great way to borrow cash at a lower interest rate than most credit cards.

When choosing between a home equity loan and a HELOC, determine your overall debt, preferred repayment schedule, the length of time you plan to live in your home, and future financial needs. If you have continual need for financial assistance, you may want to choose a HELOC. If, however, you need a one-time, fast payout, you’re better off taking out a home equity loan.

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