HELOC vs. Home Equity Loan: What’s the Difference?

Homeowners have seen their property value rise in recent years, leading to increased equity. As you look at median home prices in your area compared to your current mortgage balance, you may have enough home equity to use as collateral for a home equity loan or line of credit (HELOC). This type of financing usually comes with lower interest rates than what you find with a personal loan or credit card. Thus, a HELOC or Home Equity Loan can be useful for funding a home renovation project, sending a child to college, consolidating higher-interest debt, or paying for a wedding or family vacation. Learn more about the differences between HELOCs and Home Equity Loans so you can choose the best option to support your goals.

Home Equity: What is it and how do you build it?

Before you can choose between a HELOC or Home Equity Loan, you need to understand what home equity is and the different ways to build it.

Simply put, the amount of equity you have in your home is the current market value of your property minus the balance on any mortgages or home loans you have. For example, someone with a $200,000 home and a $50,000 mortgage balance would have $150,000 in home equity.

The most common ways to build equity in your home include:

• Paying down your mortgage balance
• Making improvements to your home (aka “sweat equity”)
• Living in a hot real estate market where demand leads to an increase in property values

Take a minute to estimate your current home equity. Generally, you can borrow up to 85% of your total equity. Leaving that 15% margin protects you from ending up “under water,” which is when you owe more on your mortgage and HELOC or Home Equity Loan than your home is worth.

What is a Home Equity Loan?

A home equity loan is like any other term loan that you might take out from a bank. You get a lump sum upfront and must pay it back over a predetermined amount of time, with interest, in fixed monthly payments. 

Home Equity Loans come with fixed interest rates, which is why the monthly payment remains the same over the loan term. As mentioned, Home Equity Loans are secured by the value of your house, which is why interest rates are so much lower than with unsecured personal loans. When interest rates are historically low, you can lock in a low rate on your Home Equity Loan and enjoy predictable monthly payments until it’s paid off. 

Benefits of a Home Equity Loan

Is this type of home financing right for you? Learn more about the benefits and uses of Home Equity Loans:

• Access your home equity in a lump sum.
• Great for homeowners who have a specific purpose in mind and know how much it will cost.
• Use the funds for just about anything, such as a large home improvement project, college tuition, vacation, consolidation of credit card debt, and more.
• Take advantage of low-interest rates.
• Home Equity Loan payments are easy to incorporate into your budget since they remain the same.
• Borrow as much or as little as you need to with affordable financing.
• Interest paid on a Home Equity Loan may be tax-deductible if the funds were used to improve your property*.

*Consult a tax advisor.

What to be aware of with a Home Equity Loan?

As with any type of debt, you shouldn’t borrow more than you can afford to repay. Since Home Equity Loans are secured by your house, you could end up in foreclosure if you are unable to make your mortgage and Home Equity Loan payments.

What is a Home Equity Line of Credit (HELOC)?

A HELOC is a revolving credit line that allows you to draw funds as needed, up to the borrowing limit, and make payments on the money that was borrowed. You can then borrow additional funds and repay them throughout the HELOC term. 

Home equity lines of credit have a variable interest rate, which means your rate may change up or down during the term length. The minimum payment due on your HELOC will also vary from month to month depending on the current balance and rate. 

Your HELOC term consists of two phases: draw and repayment. When the draw period ends, any remaining balance will be converted to a term loan and repaid in monthly installments. There may be a minimum draw requirement and a fee for closing the HELOC early.

Benefits of a HELOC

Is this type of home financing right for you? Learn more about the benefits and uses of Home Equity Loans:

• Access your home equity as needed.
• Great for homeowners with ongoing or seasonal needs.
• Use the credit line for just about anything such as a series of home renovations, education or childcare expenses, vacations, emergency reserves, and more.
• Enjoy competitive rates with your home equity as collateral.
• Make interest-only payments during the draw period.
• Interest paid on a HELOC may be tax-deductible if the funds were used to improve your property*.

*Consult a tax advisor

What to be aware of with a HELOC?

As with any type of debt, you shouldn’t borrow more than you can afford to repay. If you make interest-only payments during the draw period, you should be prepared for the monthly payment amount to increase once the HELOC goes into its repayment term. Since Home Equity Lines of Credit are secured by your house, you could end up in foreclosure if you are unable to make your mortgage and HELOC payments.

How do a HELOC and a Home Equity Loan differ?

The two primary differences between these types of home financing are flexibility and when you receive the funds.

Flexibility and Receiving Funds

With a Home Equity Loan, you receive the funds upfront and that’s it. If you end up needing more money for your renovation project, for example, you’ll have to apply for an additional loan. That’s why Home Equity Loans are best for projects with a predetermined cost, such as debt consolidation. 

On the other hand, HELOCs offer more flexibility to use the credit line as needed and as much as you want to within the borrowing limit and minimum draw requirement. That’s why HELOCs are best for multiple projects or ongoing and seasonal needs.

Apply for a HELOC or Home Equity Loan today!

Ready to learn more about HELOCs and Home Equity Loans offered in Central Illinois and the Metro East? Locally owned and operated, Town and Country Bank and Peoples Prosperity Bank treats our clients like family. Reach out to one of our knowledgeable bankers or apply today by contacting us or visiting a local office. Our friendly and attentive staff welcomes you to any of our branch locations in Springfield, Jacksonville, Lincoln, Decatur, Bloomington, Edwardsville, Fairview Heights, and Quincy.