Home equity lines of credit (HELOCs) and home equity loans are both great ways to turn the value of your home into cash that you can use. Though both turn your equity into cash, they work differently and you must know which is best for you when deciding on a home equity loan vs a HELOC.
Home Equity Line of Credit
A home equity line of credit (HELOC) gives you ongoing access to cash, with the equity of your home serving as collateral for the loan.
When you apply for a HELOC and are approved, the bank will tell you what your HELOC’s credit limit is. Once you’ve been approved, you can withdraw cash up to that limit whenever you need it.
If you don’t need the cash, you can leave the HELOC balance at zero. When you do need the cash, you can withdraw the money from the bank.
Once you start taking cash from your HELOC, the lender will start sending you a monthly bill. You can pay as much or as little as you’d like, so long as you pay at least the minimum. If you don’t pay the balance in full, you’ll be charged interest each month until the balance is fully paid off.
You can withdraw more cash, up to the limit on your HELOC, even if you already have a balance. You can also withdraw more after you’ve paid off balances you’ve incurred in the past.
In many ways, a HELOC is like a credit card, except instead of using it to pay for goods at the store, you use it to withdraw cash from the bank. There’s no obligation to use it, but having a HELOC gives you more flexibility.
The biggest advantage of a HELOC is the low-interest rate. Because your home acts as collateral for the line of credit the interest rate is much lower than a credit card’s.
Home Equity Loan
A home equity loan lets you turn your equity into cash in a single lump sum.
When you apply for a home equity loan and are approved, the lender will immediately deposit the full balance of the loan into your bank account. You’ll immediately begin receiving monthly bills and will start incurring interest.
Once you’ve paid off the loan you cannot get the cash back out of your house. You’ll need to open a new home equity loan or apply for a HELOC to get access to cash again.
Taking out a home equity loan is a lot like taking out a second mortgage on your home, since the loan is secured by your home. If you’re unable to pay the bill the lender can repossess the home and sell it to recoup the loss.
Because you get the money in one lump sum, home equity loans are best for large expenses such as home improvement projects. Because your home serves as collateral for the loan, the interest rate will be much lower than for a credit card or a personal loan.
HELOCs and home equity loans are both good ways to turn your home equity into cash, but both have their own advantages and disadvantages.
HELOC vs. Home Equity Loan
|HELOC||Home Equity Loan|
|Only take cash when you need it.||Immediate, lump sum of cash.|
|Best when you want the flexibility to withdraw cash for smaller expenses, as they come up.||Best for large expenses such as home improvement projects.|
|Withdraw cash even after paying off previous withdrawals.||Once you pay it off, you cannot withdraw money without applying for another loan.|
If you want more information about HELOCs, home equity loans, and other types of mortgages, check out InvestmentZen’s Definitive Guide To Mortgages.
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