Home Equity Loans (HEL) vs Home Equity Line of Credit (HELOC)
What is the difference between a home equity loan and a home equity line of credit?
Home equity loans (HEL) and home equity lines of credit (HELOC) are two useful sources of financing when you're a homeowner. The interest on both HELs and HELOCs are lower than credit card rates as they are secured by your home, which makes them an attractive source of funds.
A home equity loan (HEL) allows you to borrow a fixed amount against the equity in your home. Your home equity is calculated as the market value of the home minus the lien on the home, If your home is worth $400,000 and has a mortgage of $250,000 on it, then your home equity is $150,000 ($400,000-$250,00). Home equity loans are paid out in a lump sum and usually have a fixed rate, fixed term and fixed monthly payments. Like all loans, how much you can get and the interest rate you will pay depends on:
- Your home’s loan to value ratio
- Payment term of the home equity loan
- Verifiable income
- Credit history
A home equity line of credit (HELOC) uses your home equity to create a kind of revolving credit that you can borrow from. After you have been approved, your HELOC can be used to purchase just about anything within the credit limit. You can draw from the credit multiple times as well. You will usually be given special checks or a credit card to use by your home equity lender. There is a period in which the home equity line of credit is valid. HELOCs usually have an adjustable interest rate.
Here are a few key differences between the HELOC and HEL:
Home equity loans are 100% tax deductible (talk to your tax consultant about this)
Home equity loans are paid out as a single lump sum. Home equity lines of credit allow you to withdraw multiple times within the credit limit.
Home equity loans usually have a fixed interest rate, while home equity lines of credit have a variable interest rate
Payment for home equity loans is straightforward, it’s the same amount which pays off the interest and principal simultaneously. Home equity lines of credit usually require you to at least pay the interest amounts every month and then the principal at the end of the loan term
How do I choose between a HEL and a HELOC?
Which equity loan you choose depends entirely on your needs. For example, if you need to make renovations on your home then a HELOC is better than a HEL. A HELOC will allow you to pay interest on the credit you use as you build stage by stage, a HEL will have you pay interest on a lump sum while you are waiting to use it on the next stage of building.