Do You Know the Difference Between a Home Equity Loan and Line of Credit?

Editor’s note: This article was originally posted January 2012 and has been updated May 2015 for relevancy.

Have you reached that point in life where you need to finance a major expense, like a renovation or a child’s tuition? If you own a home, you may consider borrowing from the available equity in that home. The two ways to do this are through a home equity line of credit (HELOC) or a home equity loan (HEL). There are similarities, but depending on your circumstances, one can be a better choice.

Borrowing against the equity in a home has become increasingly popular due to lower interest rates and potential tax-deductible advantages (check with your tax advisor for details). And while both a HELOC and HEL use the value of your home to secure the loan, either must be paid in full if you sell or refinance the home. Here’s a look at some of the key factors to consider.

HELOC Defined

Like a credit card,a home equity line of credit extends you credit up to a predetermined limit. Unlike a credit card, a HELOC is secured debt because you secure your home against the loan, which results in lower interest rates.

Typical uses for a HELOC:

  • Small to large remodeling projects such as a kitchen, bath, deck or roof replacement
  • Establishing a safety net for unexpected financial expenses such as medical bills
  • College tuition

Your lender will supply you with a variable rate line of credit that you can draw from as needed during the permitted draw period, generally 10 years. You can borrow just the money you need, and only when you need it with easy access to the funds through a checkbook, electronic transfer, or online banking. 

HEL Defined

Home equity loans have fixed rates and are structured like a traditional mortgage. You receive a one-time lump sum and make fixed monthly payments with the interest rate staying the same for the life of the loan. 

Typical uses for a HEL:

  • Large one-time expenses like a major home renovation or a wedding
  • Consolidating debt

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HELOC or HEL?

Still not sure which option is best for you? This infographic discusses some of the most significant differences between HELOCs and HELs. Arm yourself with this list of questions when discussing programs with your lender in order to make an informed decision.

  • Will I be charged an application fee?
  • Will applying for a HELOC affect my credit score?
  • Will I have to pay an annual line of credit or participation fee?
  • How will my HELOC credit line be determined?
  • What is the initial interest rate and how will it change over the life of the loan?
  • Will my interest be tax deductible?
  • Will I have the option of converting to a fixed interest rate?
  • Is a lifetime interest rate cap available?
  • How can I access my HELOC?
  • Does the home equity line of credit expire after a specified term, after which time full payment is required?
  • Do I have to maintain a minimum balance?
  • Will I be charged closing costs?

Final Considerations

Be responsible about tapping into your home’s equity. HELOCs and HELs both add to the combined loan-to-value ratio (LTV) of your home. This compares how much you owe to how much your home is currently worth. A high LTV could put you underwater if housing prices fall. And worse case, if you can’t pay back the loan or line, you could lose your home. Before you take out a home equity loan or line of credit, have a plan for how to pay it back.

We’d be happy to answer any other questions you have about home equity lending. Simply call Customer Service at 866-224-1379 or visit any of our branch locations.

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