Home Equity Loan or HELOC? It Depends on Your Goals

Both a home equity loan and a home equity line of credit (HELOC) can accomplish the same thing: convert your home equity into cash for almost any purpose.

But each comes with different terms. Which one should you choose?

Home Equity Loan: You receive a lump sum and pay principal and interest similar to your primary mortgage. The rate is usually fixed.

HELOC: You receive a line of credit. Borrow and pay back as needed similar to a credit card. The rate is usually variable.

Both loans are second mortgages. Neither affects your first mortgage rate or terms.

See if you qualify for a home equity loan or HELOC.

When to Use a Home Equity Loan

You should use a home equity loan when you need the full loan amount upfront and don’t need to pull funds out again as you pay them back.

You might also choose a home equity loan if you prefer a fixed rate and payment.

Good use cases are:

• Consolidating credit cards and other debt

• Paying a divorce settlement

• Making a down payment on another home

• Paying for a wedding

• Buying a vehicle

• Paying for tuition

However, a home equity loan may not be the best choice if you don’t need all the funds right away.

See if you are eligible for a home equity loan.

When to Use a HELOC

A HELOC works well for those who need an open credit line to borrow and pay back funds as needed.

This option is also best if you need little or no funds upfront but will need more later. You only pay interest on the amount borrowed.

Good use cases are:

• Home renovations

• Financing a property flip

• Fund business payroll or increase liquidity

• A source of emergency funds

• Funding tuition as you go

You can often convert all or part of your HELOC balance into a fixed home equity loan. This locks in your rate and payment.

Home Equity Loan Pros

• Receive a large amount of funds upfront for any purpose

• Fixed rates

• You pay down principal with each payment

• Predictable payments

Home Equity Loan Cons

• No additional access to funds after loan closing

• Larger payments, since you’re paying principal and interest

• You pay interest on the entire amount immediately

• Rates are typically higher than for HELOCs

• May come with higher closing costs versus a HELOC

HELOC Pros

• Easy access to funds when you need them

• Pay interest on borrowed funds but not the undrawn limit

• You can open a zero-balance HELOC and never borrow from it unless needed

• Borrow, repay, and re-borrow as needed for up to 10 years

• Rates are typically lower than home equity loans

• Many lenders offer low- or no-closing-cost HELOCs

HELOC Cons

• Variable rates and payments

• You don’t pay loan principal if you make the minimum payment

• Easy to over-borrow

Comparing Home Equity Loans and HELOCs

Home Equity Loan and HELOC Alternatives

Personal loans: These are best when you need less than $25,000 and do not want a lien on your home. Interest rates are much higher than for home equity loans and HELOCs

Credit cards: Doing a few zero-interest balance transfers may work better than consolidating credit card debt using home equity.

Cash-out refinance: You can replace your first mortgage with a new, larger one and take the difference in cash. However, you’re subject to larger closing fees and will lose your existing first mortgage rate. Related: Cash-Out Refinance vs HELOC

Reverse mortgage: A reverse mortgage works better than a HELOC when the homeowner is over 62 and can’t afford a payment. Closing costs are much higher.

Which One is Better for You?

Both home equity loans and HELOCs work well to quickly tap home equity to accomplish financial goals. But your goal will determine which one you choose.

Connect with a knowledgeable professional to see which option is better for your situation.