Home equity, am I right? You’ve got it and want to use it. That kitchen isn’t going to upgrade itself. Those credit card balances are high. What’s the best way to access your home equity? I’m glad you asked. I’m going to lay it all out for you here.
Most people use the term HELOC and HELoan synonymously. This is probably because they both involve using your home equity as collateral for a loan. However, it isn’t the similarities that matter, but rather the differences that you need to understand before you sign the dotted line.
That being said, let’s go ahead and knock out the similarities.
· Both use your home equity as collateral. Exact percentages vary, but you can generally take out 80-90% of the value of your home for loan use. Don’t forget to subtract your existing mortgage balance though.
· Both generally offer the lowest possible interest rates in the loan category. That’s because lenders assign a lower interest rate if the risk to them is lower. People protect their houses above everything else, so the risk is the lowest.
· Both can take a long time from application to closing. The fastest I’ve seen is 8 days. Most people should expect 2-6 weeks from application to closing.
· Both generally carry terms that are between 5-20 years
Now that those are out of the way, what are the differences?
· A HELOC is a revolving line of credit / A HELoan is a fixed loan. This means the HELOC can be borrowed from repeatedly whereas the HELoan only has the initial draw and no more after that.
· A HELOC has a variable rate / A HELoan has a fixed rate.
· A HELOC sometimes offers a way to waive closing costs / I have never seen a HELoan offer this waiver before.
· A HELoan can take longer because it involves a Loan Estimate and a Closing Disclosure—2 forms you don’t see on HELOCs.
· Many HELOCs have interest-only payments / HELoans have a full amortization schedule factored into each payment. You also only pay interest on the amount of your balance withdrawn from a HELOC. For a HELoan, your balance is set at max up front.
So, how do you know which one is better for you in your situation? I’ll give you a few scenarios and suggestions that should help.
· A HELOC will probably be the best option if you:
o Aren’t sure how much $$$ you’ll need up front. Still getting estimates? Don’t have a total number yet? Go ahead and apply for the max HELOC you can qualify for and only take out what you need.
o Think repairs/upgrades will take a while and/or occur in stages. Similar to the last point, the HELOC lets you continuously pull from it as long as funds are still available.
o Think interest rates are going down. We’re in the middle of this right now as I’m writing this(May 2025). I add this point because if you get a HELOC today and rates are dropping, then you take advantage of the rate reduction each time it happens.
o Don’t want to pay closing costs. I’m not saying this is a guarantee, but many HELOCs offer a way to waive all closing costs involved in the process. Ask your lender. This can save you around $600-$1,000 on average.
o Need the lowest possible payment. Since many HELOCs offer interest-only payments, you’ll have the lowest possible payment amount compared to anything else. (Be careful here though—if you only pay the minimum amount due each month then your balance will never go down)
· A HELoan will probably be the best option if you:
o Like to know exactly how much your payment will always be and when the loan will be paid in full.
o Think interest rates are about to rise
o Know exactly how much $$$ you need up front and won’t need a penny more.
o Are ok waiting a little longer for the funds vs. a HELOC
o Are consolidating a bunch of debt and want to lock everything in and eliminate the temptation to easily borrow more in the future
*One point worth mentioning: Some HELOCs offer the option to convert existing balances into a fixed rate/term loan. The way this works is you apply for a HELOC, take out a draw, and then convert that balance into a fixed loan inside the HELOC(essentially converting the HELOC into a HELoan). This can work in your favor if you apply for a HELOC to get the closing costs waived and then turn around and convert it to a fixed loan anyway.
Now for the shortest, simplest way for me to break this down for you: if you want a flexible product with a variable rate that you can pay down and borrow against for a long period of time? Then a HELOC is for you. If you like a fixed rate, term and amortization schedule, then a HELoan is the way to go.
