Confused Between Home Equity Loans and HELOC?

If you need funds to pay for a home renovation or to clear your credit card balance, you can borrow against the equity you have in your home. This can be done primarily through two ways – a home equity loan or a HELOC. Although they sound similar, a home equity loan and HELOC are different products. Here’s how you can know the difference between the two.

What is a Home Equity Loan?

A home equity loan works like your mortgage loan. The amount that you can borrow will usually depend on how much equity you have in your home. Most lenders will allow you to borrow up to 85% of your home’s equity. If your loan is approved, you’ll receive the funds as a lump sum and you’ll need to make monthly repayments over a period of years. A key benefit of home equity loans is that the rate of interest is usually fixed, which can help you plan your repayments.

What is a HELOC?

A HELOC or a home equity line of credit, acts more like a credit card than a typical loan. When you sign up for a HELOC, your maximum spending limit is based on the equity you have in your home. HELOCs have a revolving credit line, which means you can use this as a source of credit more than once. With HELOCs, you have a draw period and a repayment period. During the draw period, you can withdraw money and make small monthly payments. These payments usually just about cover the interest. During the repayment period, the repayment amount will increase, and you won’t be able to draw any more money. Keep in mind that the interest rate charged on a HELOC is usually variable.

Which One Should You Opt For?

If you require funds, you could borrow a home equity loan or a HELOC, based on the purpose of the credit and your repayment preference. If you prefer having access to a lump sum and repaying it in fixed amounts, a home equity loan is your best bet. On the other hand, if you require smaller amounts of money at different times, you can opt for a HELOC. Remember that with a HELOC, it is harder to know exactly how much you owe the lender since the interest is likely to change from time to time.

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