What’s the difference between a HELOC and a home equity loan?
If you are looking to access the value you’ve built up in your home, you may want to consider a home equity line of credit (HELOC*) or a home equity loan. Both are types of second mortgages and will use your home as collateral, and they allow you to access your home’s equity in different ways.
Learning what a HELOC and a home equity loan are, as well as the differences between them, can help you figure out which option is best for your needs.
To start on your application process and find out if a HELOC or home equity loan is right for you, connect with a lender today!
What is a HELOC?
A HELOC opens a line of credit based on your home’s equity. HELOCs traditionally work in two periods: a draw period and a repayment period. During the draw period, you may make draws on your line of credit up to an approved amount. When you are in the draw period, you don’t have to worry about paying back your loan and will just need to pay the interest on it.
After your draw period ends, you will enter your repayment period. You cannot make more draws after your repayment period starts and are required to start paying back your original loan and the interest on it.
A HELOC through us will look slightly different. Our HELOCs give you your loan amount up front, and as you start paying your loan, you will have the opportunity to make additional draws on your line of credit. HELOCs with us can get you access to a line of credit up to $400,000.
What is a home equity loan?
A home equity loan gives you an upfront lump-sum based on the amount of equity you have built up in your home. Similar to your original home mortgage, you will have to make monthly payments on the loan amount with interest. These payments usually start within a few weeks of approval.
To estimate how much your lump-sum will be, you can take your home’s current value and multiply it by the percentage that lenders let you borrow (normally around 80%-85%) and then subtract your remaining mortgage balance. The number you end up with will be around the amount a lender will approve you for. Your exact loan amount will be determined after a lender reviews your original mortgage and finances.
HELOC vs. home equity loan: key differences
While both HELOCs and home equity loans allow you access to the value you have built-up in your home, knowing the differences between the two can help you decide which is best for your needs.
Loan disbursement
Traditional HELOCs allow you to access your loan as needed up to your limit. This is useful for homeowners who aren’t sure how much they will need to borrow. With multiple draws, you can pay for any ongoing expenses and help make sure you don’t borrow money you won’t need.
If you are looking for a larger amount upfront, a home equity loan might be a better option for you. A home equity loan will give an upfront lump-sum based on the difference between your home’s value and the mortgage balance.
Requirements
To qualify for a HELOC or home equity loan, you will need to have at least 15% equity in your home. Home equity loans require a credit score of 620 or greater, while a HELOC looks for a slightly higher credit score of at least 640. Lenders typically look for a debt-to-income (DTI) ratio below 43% for home equity loans and debt-to-income ratios under 50% for a HELOC.
The exact requirements for either a HELOC or home equity loan might vary depending on your lender.
Interest rates
Interest rates for a HELOC are most often variable, but some lenders will allow fixed rates. Variable interest rates mean that you might have smaller payments some months, depending on where the interest rates are at. Fixed rates will stay the same for your entire loan, allowing you to better plan what your payments will be as they won’t change from month to month.
Home equity loans come as either fixed or variable, depending on your lender and what your financial situation looks like.
Repayment
If you aren’t able to make payments on the loan right away, a HELOC might be a better option as your repayment period doesn’t immediately start. However, you will have to start making interest payments on your HELOC upon receiving it.
Monthly payments on home equity loans will start shortly after you get your lump-sum. Your monthly payments with a home equity loan make up the loan amount and interest.
How to get a HELOC or home equity loan
Whether you have decided on a HELOC or home equity loan, your application process will be similar. For your application, lenders will want to look at your proof of income, tax returns and original mortgage. This can help them figure out the terms of your loan.
Typically, you can start accessing your funds from either a HELOC or home equity loan about a week after closing.
If you are ready to start accessing your home’s equity, talk with a lender to see what your options are!