HELOC vs Home Equity Loan: Key Differences

August 31, 2022

According to the latest data from the New York Federal Reserve, in the first quarter of 2022 total home equity increased by $1.6 trillion from the previous quarter, the largest quarterly increase since the Great Recession of 2008. This has led many homeowners look for ways to tap into their home’s equity for things like home improvements, debt consolidation, and investment properties.

While many recognize both home equity loans and home equity lines of credit (HELOCs) are available, not all are aware of the differences between the two and which is best for their specific needs. To help, the personal loan experts at BayFirst have created the below HELOC vs. Home Equity Loan cheat sheet to use when you’re ready to maximize the value of your home to tackle your next project or cover an expense.

Both HELOCs and Home Equity Loans:

• Can be used when the value of your home exceeds the amount you owe on it.
• Allow you to borrow up to roughly 85% of your home’s equity.
• Have better interest terms than other personal loans because you are using your home as collateral.
• Provide funds that can be used for various purposes, including consolidating debt and making home improvements.
• Could result in you losing your home if you cannot make payments.

Home Equity Loans:

• Give you a lump sum up front.
• Come with fixed payments and a fixed interest rate for the life of your loan.
• Are best for one-time purchases.
• Do not provide access to additional funds in case of emergency.
• May have higher rates than HELOCs because you are paying for the predictability of a fixed rate.

HELOCs:

• Allow you to tap into your home’s equity as needed and over time up to a certain credit limit.
• Come with variable interest rates and variable minimum payments which will change based on credit improvements or fluctuating market rates.
• Allow you to withdraw funds from your credit lines as long as you make interest payments.
• Allow borrowers to draw money as they need it and in case of emergency.
• Have an interest-only payment option.

Still unsure which route to take? Talk to an expert before tapping into your home’s equity. Based on the purpose of the loan and your financial situation, they can help you decide which option is right for you or if there are other personal loans to consider instead.