HELOC vs. Home Equity Loan: Which Is Right for You?
Both HELOCs and home equity loans let you borrow against your home's equity, but they work very differently. Understanding these differences is crucial to choosing the right product.
Key Differences
HELOC (Home Equity Line of Credit):
- Revolving credit line (like a credit card)
- Variable interest rate
- Interest-only payments during draw period
- Borrow as needed, up to your limit
- Two phases: draw period (5-10 years) and repayment period (10-20 years)
Home Equity Loan:
- Lump sum disbursement
- Fixed interest rate
- Fixed monthly payments from day one
- Borrow once, repay over time
- Single repayment period (typically 5-30 years)
When to Choose a HELOC
- You need ongoing access to funds (renovations over time)
- You want flexibility to borrow only what you need
- You can handle variable interest rates
- You want lower initial payments
When to Choose a Home Equity Loan
- You need a specific lump sum amount
- You want predictable fixed payments
- You prefer rate stability
- You're consolidating high-interest debt
Cost Comparison
HELOCs typically have lower closing costs ($0-$500) compared to home equity loans ($500-$5,000). However, variable rates on HELOCs can increase over time, potentially making them more expensive in the long run if rates rise significantly.
Expert Tips for Smart Borrowing
The Project-Based Choice
One-time big expense (New Roof)? Get a Home Equity Loan. Ongoing uneven expenses (3-year remodel)? Get a HELOC.
Rate Hike Insurance
If you think inflation is sticking around, take the Fixed Rate Home Equity Loan. Sleeping well at night is worth the 0.5% premium.
Check Pre-Payment Penalties
Some banks charge you if you close a HELOC within 3 years (to recoup their 'no closing cost' offer). HELOANs rarely have this.
Fixed Budgeting
If you live on a tight fixed income, a HELOAN is safer. You know exactly what the check needs to be for the next 15 years.