What is a Home Equity Line of Credit vs. a Home Loan?

First Financial Bank
You have heard the term “HELOC” or “home equity line of credit” – but what does that really mean? Is it the same as a home equity loan or something entirely different? As a homeowner, it is important to know the difference.

You have been a conscientious homeowner and have begun to build up the equity in your home. And now, other things on your horizon may need funding, such as a major kitchen or bath repair/renovation for your home, a chance to take your spouse on that once-in-a-lifetime special anniversary trip – or just the opportunity to consolidate some other debts. How can you use some of this value you have built up towards your other financial needs? You will want to evaluate whether a home equity line of credit vs. a home equity loan is the best option for you.

What is a HELOC?

A HELOC is a line of credit, similar to a revolving line on a credit card, which allows you to borrow up to a specific amount of your home’s value while you are paying it off. However, a HELOC tends to have much lower rates and better terms than your typical credit card. You can withdraw the money whenever needed without having to reapply for a loan each time, and the interest does not start accumulating until you have drawn that money. This can be an attractive approach for different types of needs, such as when you have several one-off expenses coming up over the next few months (or couple of years) such as replacing outdated kitchen appliances and your milestone anniversary trip. We’ve even had one of our clients use equity in their home to help finance the expansion of their small business. When the need arose, they were able to use the line of credit to fund short-term inventory needs. Regardless, you should always consult with your tax advisor to see if any of your interest is tax-deductible.

A Home Equity Loan

This is what you typically hear referred to as a “second mortgage” – a standard loan against the equity you have built up in your home where you receive the amount all at once and begin to pay it back immediately. Depending on why you are looking to take the home equity loan and the pattern of your income or cash flow, this may be an appropriate option for your situation. If you need to replace your roof immediately and consolidate some of your other debt at the same time, this may be a good fit. These loans come in various options to customize for your needs, which you will want to explore with your financial advisors and lender to confirm whether a home equity loan makes sense for you.

Choosing Between a Home Equity Line of Credit vs. a Loan

How do you choose between these? What makes the most sense for your situation? Many people find the flexibility of a HELOC provides them with what they need now – and later – and still only requires one round of application processing. However, it is important to work with your financial and tax advisors to determine what may be the best fit for you. Even within those two categories are a variety of options, including how they accumulate interest (fixed and variable) and terms for paying back the loaned money. You will also want to consider other pending important life changes that may impact your decision: job relocation, health issues, or retirement planning. Use your trusted advisors to help you evaluate your options and talk to your lender to make a decision that is right for you.

Want to discuss a HELOC or home equity loan? Let’s chat!


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