Home Equity Line of Credit (HELOC) vs. Home Equity Loan

Selling your home isn’t always a practical option when you need cash to cover major expenses. You can make your home’s value work for you by tapping into your home equity as a cash resource.

Home equity is simply the difference between the market value of your home and how much money you owe on your mortgage. You can choose from two options with home equity based financing:

• Home Equity Line of Credit (HELOC)
• Home Equity Loan

What is a Home Equity Line of Credit (HELOC)?

A home equity line of credit lets you access funds as you need them, like a credit card – but usually carries a much lower interest rate. A HELOC also allows the flexibility of having funds available without having to pay until you draw against your credit line; this can provide ready cash in case of an emergency. It is an ideal solution for those times when you need cash for an emergency or for recurring expenses like paying a contractor or buying appliances for a remodel.

A HELOC doesn’t require a formal closing process and it typically has lower or zero upfront costs when compared to home equity loans. Such costs can include a loan origination fee, an annual fee and an appraisal fee used to determine a home market’s value. USC Credit Union does not charge up-front costs or annual fees on HELOC loans, so you can get the money you need without extra expense.

Interest rates are usually variable and minimum monthly payments fluctuate based on the current market rate. You can choose to pay interest-only monthly payments for up to 10 years. You may also only pay interest on what you borrow. Loan amounts range from $10,000 to $250,000. These amounts are determined by income, credit history and home market value.

What is a Home Equity Loan?

A home equity loan is more predictable because you know the term of the loan (length in years) and because the rate is fixed your payment won’t change from month to month. It is best for when you need to borrow a predetermined amount of money for a specific purpose. This is a fixed-rate loan that lets you receive cash up front in a lump sum. Monthly payments remain the same and you cannot borrow further from the original loan. USC Credit Union offers home equity loans, or Closed End Home Equity Loans, for amounts from $10,000 to $250,000 on 10-year or 15-year terms.

A home equity loan essentially functions like a second mortgage. It features a fixed interest rate and you repay both interest and principal each month. Since it offers a fixed interest rate, a home equity loan usually features higher interest rates up front than a HELOC. The actual loan amount is determined by the same criteria used for a home equity line of credit.

Which option should you choose?

The answer to this question is rarely black and white, but your reason for borrowing is a key factor.

When to choose a Home Equity Loan

• A large one-time expense 
• Consolidate a specific amount of debt

That way you can pay off the loan without the temptation to access any available credit remaining – because there isn’t any.

When to choose a Home Equity Line of Credit

• Unexpected expenses
• Recurring expenses (e.g., paying a contractor over the course of a remodel)

With a HELOC, you pay as you go and only pay interest on the amount you advance.

In both cases, your home serves as collateral for whichever form of home equity financing you choose and failure to repay according to the terms of the loan can lead to losing your home to foreclosure.

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