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Home Equity Line of Credit (Heloc) vs. Home Equity Loan: Which is Best?

May 9, 2024

When you want to leverage the equity in your home, you need to know your options. Understanding the differences between a home equity line of credit (HELOC) and a home equity loan is crucial. 

Both allow you to borrow against your home equity. Yet, each option has distinct features and requirements that can impact your financial strategy differently. Learn more before you decide if a HELOC or home equity loan is better for your needs.

What is a Home Equity Line of Credit?

home. Like a credit card, a HELOC is a revolving line of credit you can draw from as needed. Upon receipt of your credit line, you will enter the draw period and later move into the repayment period.

The draw period may last five to ten years. During this time, you can borrow up to your credit limit and make interest-only payments.

When the draw period ends, the repayment period begins. At this time, you will be required to make payments toward the principal balance. You will no longer be able to draw from the account. 

Recommended: What You Should Know About HELOC Loans 

What is a Home Equity Loan?

A home equity loan, also known as a second mortgage, involves borrowing a lump sum of money. Like a HELOC, a home equity loan is also secured by the equity in your home. Unlike a HELOC, a home equity loan typically comes with a fixed interest rate and fixed monthly payments over a set term. 

Recommended: Unlock the Value of Your Home’s Equity Today

Similarities Between a HELOC and Home Equity Loans

Again, both HELOCs and home equity loans are secured by the equity in your home. So, when you take out a HELOC or home equity loan, you leverage the value you've built up in your home. This gives you the ability to access funds at low interest rates. In exchange, your home serves as security for the loan.

When your home serves as security, also known as “collateral,” it gives the lender certain rights. The bank you borrow from will have the right to foreclose on your home, though this only happens if you fail to repay the funds as agreed. 

Both HELOCs and home equity loans can be used for a variety of purposes, like: 

  • Home improvements. 
  • Debt consolidation. 
  • Major expenses.

Lastly, HELOCs and home equity loans may both offer potential tax benefits. Consult a tax advisor for details about how home equity funding may impact your situation.

You might also like: Can You Change Your HSA Contribution at Any Time? 

Differences Between HELOCs and Home Equity Loans

The primary differences between a HELOC and a home equity loan include the repayment structure, interest rates, access to funds, and usage flexibility.

First, HELOCs offer a flexible, revolving line of credit with interest-only payments during the draw period and principal and interest payments during the repayment period. Meanwhile, home equity loans have fixed monthly payments starting immediately after disbursement.

Next, HELOCs often have variable interest rates tied to an index. On the contrary, home equity loans generally feature fixed interest rates.

Then, HELOCs provide ongoing access to funds during the draw period. During the draw period, you won’t have to repay the principal. Conversely, home equity loans provide a one-time lump sum and repayment begins right away.

Finally, HELOCs are ideal for ongoing expenses or projects where costs may vary over time. Home equity loans are better suited for one-time expenses like major renovations.

You might also like: Is a HELOC Right for Me? The Most Common Questions 


HELOCs vs. Home Equity Loan: Which is Better for You? 

home equity line of credit or home equity loan

To determine which home equity funding option best suits your needs, it's important to consider several factors that differentiate a HELOC from a home equity loan.

A HELOC might be the better choice if:

  • You have ongoing, variable expenses. HELOCs are ideal if you anticipate recurring costs like home renovations or tuition payments over time. They allow you to borrow as needed during the draw period.
  • You prefer flexibility. HELOCs offer flexibility in borrowing and repayment. During the draw period, you can access funds as required. Plus, you have the flexibility to make interest-only payments.
  • You want the option to reuse funds. With a HELOC, once you repay the borrowed amount, you can reuse the available credit line during the draw period. And you won’t have to reapply for a new loan.

A home equity loan could be the best option if:

  • You have a specific, one-time expense. If you have a defined need, like a major home repair or debt consolidation, an equity home loan provides a lump sum upfront. This makes it suitable for fixed expenses.
  • You prefer predictable payments. Home equity loans come with fixed interest rates and fixed monthly payments. This offers predictability and stability over the loan term.
  • You want a structured repayment plan. Home equity loans typically have a fixed term for repayment. This allows you to plan your budget with certainty.

If you're still unsure which option best aligns with your financial goals, read the Consumer Financial Protection Bureau Home Equity brochure. Next, speak with our consumer lending team. They can provide personalized guidance based on your specific situation and needs, helping you make an informed decision about effectively leveraging your home equity.

You might also like: Local Assistance for Homeowners | Financial Counseling 

Unlock the Value of Your Home's Equity With Centier

Deciding between a home equity line of credit and a home equity loan depends on your financial situation, goals, and borrowing preferences. Each option has distinct advantages and considerations. At Centier Bank, we're here to help you navigate these choices and find the solution that best fits your needs.

Ready to explore your options? Learn more about Centier Bank's Home Equity Loans or schedule a consultation with one of our financial experts.