HELOC vs. Home Equity Loan: Which Is Right For You?

Home equity loans and HELOCs are options that allow you to take advantage of the equity you have in your home. With both borrowing options, you borrow against the equity in your home.

The best borrowing option for you depends on your spending needs and financial situation. Before getting a HELOC or home equity loan, it’s important to consider all the factors and how they’ll work for you.

You can apply for HELOCs and home equity loans quickly and easily online today with Arkansas Federal Credit Union (AFCU). 

What Is Home Equity?

Home equity is the amount of your home that you own outright. To calculate how much equity you have in your home, you can take the market value of your home and subtract what you owe on your mortgage. The amount left is what you own in equity.

You can use this equity as collateral in a loan through a home equity loan or home equity line of credit (HELOC).

Home Equity Loan vs. HELOC

Both home equity loans and HELOCs are two types of second mortgages that draw on home equity. When borrowing against your equity, you’re using your home as collateral. If you miss loan or line of credit payments, your lender could foreclose on your home.

When considering home equity vs. HELOC, the main differences are how you access your money and repay the loan.

HELOCs typically have adjustable or variable interest rates, which means that the interest rate you’re paying will change with the market. Because a HELOC is a line of credit, you can access and spend money as you need it, and you only pay for the amount of money that you borrow. You can continue to borrow up to your credit limit as you need more money.

Home equity loans tend to have fixed interest rates that are locked in when you get your loan. With a home equity loan, you’ll receive a lump sum amount you’re borrowing and then begin to pay it back after that. You can’t increase the amount you borrow once your loan is finalized. 

When To Choose A Home Equity Loan

With a fixed interest rate, your payment amount will be the same each month. Because you know your payment amount ahead of time, it can be easier to budget for home equity loan payments.

With a home equity loan, you receive one lump sum, making them good money sources for major projects or one-time expenses. 

However, tapping into your equity all at once with a lump sum could hurt you if property values decline in the future. If you’ve spent a large amount of your home equity loan and then your property value declines, it could be difficult to pay back, even if you sell your home.

Home equity loans are best if you have a single, larger expense you want to pay for and know you will be able to pay back the loan.

When To Choose A HELOC

A home equity line of credit works very similarly to a credit card. You’ll have a credit limit, and you can borrow as much as you need up to that credit limit. During the draw period on your HELOC, you typically only have to pay interest on the amount you draw from the line of credit. However, payments could also include principal paydown. So, be sure to check with your lender on the amount you’ll need to pay back and when.

HELOCs often have lower interest rates than other borrowing options, but HELOCs also have variable interest rates. With a variable interest rate, your payments can change throughout the loan term. Keeping track of interest rates is important because rising interest rates can make your payments higher.

When using a HELOC, you must be careful not to overspend on your line of credit. You’ll be able to borrow against your line of credit, but you should keep in mind not to borrow more than you will be able to pay back.

HELOCs are best if you have a number of expenses or want to be able to use your home equity over time for multiple expenses, can make the payments, and are able to keep your spending in check.

Apply for a HELOC or Home Equity Loan Today

HELOCs and home equity loans can be great options for lower-interest ways to access money by taking advantage of the equity you already have in your home. Because your house is collateral, HELOCs and home equity loans allow you to borrow money at lower interest rates than other types of loans or lines of credit.

Comparing HELOC loans vs. home equity loans can help you determine the best option for your situation. While both options have similarities, there are also important differences that you should consider.

You can easily apply online for both HELOCs and home equity loans. The Arkansas Federal application process is quick and easy, and you can complete it from the comfort of your home.
Apply online today or visit one of our local branch offices to start the application process.