Many people think Home Equity Lines of Credit (HELOCs) and Home Equity Loans are the same thing because they sound alike. In reality, they have some similarities but are very different regarding how and when you access the funds. In this post we’ll discuss the differences between the two and describe a few reasons to use each.
HELOC vs. Home Equity Loan
So, what is the difference between a HELOC and home equity loan? While they both borrow against your home’s equity, they go about it a bit differently. A HELOC allows you to draw on your home’s equity on an as-needed basis with a variable interest rate acting like a credit card that uses your home as collateral. A home equity loan on the other hand, gives you a lump sum up front with a fixed interest rate. They both use your home’s equity as collateral backing which is why they are usually referred to as “second mortgages”.
Why a HELOC?
A HELOC tends to be a better option for those who need extra money over a long period of time. For example, if your kid is going to college and you need to pay tuition over the next 4 years, a line of credit is ideal. You simply borrow the amount you need when you need it and only pay off the amount you’ve used. Check out a few more reasons to use a HELOC.
Why a Home Equity Loan?
A home equity loan is a better option for those who need a set amount of money up front. For example, if you need a new roof that will cost $3,000 and you’re planning a family vacation that will cost about $5,000. An $8,000 home equity loan is ideal for this situation because you know exactly how much you need to borrow.
Different situations call for different types of home loans. Determine if you need a larger sum of money now or have a longer-term financial commitment that will require spread out payments. Have more questions? Stop by an RMLEFCU branch or call to speak to a loan specialist today! You can also check out these helpful videos to learn more.