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

When homeowners face a major expense like home repairs, medical expenses, or debt consolidation, many turn to using their home equity. Home equity refers to the value built up in a home over time. For example, if your home’s market value is worth $300,000 and you still owe $200,000 on your mortgage, your home equity would be $100,000. When you decide to proceed with using your home equity, there are typically two options to choose from – a Home Equity Line of Credit (HELOC) vs. Home Equity Loan.

HELOC vs Home Equity Loan

While both have the same functionality of borrowing funds against your equity using your home as collateral, they vary by how you will receive the funds and when you pay it back. Using the same example above of having equity of $100,000, a HELOC will allow you to draw on the line of credit over time. You may use a portion of it as needed and pay a variable interest rate on the amount you have used during the draw period. You can use CCCU’s free HELOC calculator to get an estimate on your HELOC.

On the other hand, a Home Equity Loan is when you receive a lump sum of $100,000 upfront and pay monthly fixed payments over a set period. Your decision between the two will come down to choosing the better interest rates and repayment terms that will work best for your unique financial situation.

Interest Rates

Most HELOCs have variable interest rates compared to the fixed interest rate on a Home Equity Loan. The variable interest rates can fluctuate over time based on the changes in the market, potentially leading to higher costs over time.

On the other hand, a Home Equity Loan offers fixed interest rates that remain the same for the entire term of the loan. This can provide you with predictability in your monthly payments regardless of fluctuations in the market.

Payments

When you use a HELOC, the draw period usually lasts up to ten years. During this period, you have access to use the funds as needed, similar to a credit card. The advantage of a HELOC is you only pay interest on the amount you borrowed, not the entire credit line.

When the draw period ends, you transition to the repayment period where you are no longer allowed to borrow but instead being to pay both principal and interest. Remember that HELOCs typically have variable rates that are tied to market conditions, which could affect your monthly payments.

What’s The Best Choice?

While HELOCs and Home Equity Loans both offer flexibility in how you can use the funds, the choice between the two depends on your preferences for interest rates and repayment terms.

At CCCU, our team is available to discuss your options and determine if a HELOC or Home Equity Loan aligns best with your circumstances. To schedule an appointment, please call us at 702-228-2228 or visit www.CCCULV.org to learn more about HELOCs and Home Equity Loans.

Helpful resources:

• How Long Does It Take to Get a HELOC?
• Should You Use a Home Equity Loan for House Repairs and Improvements?