Not sure if a HELOC or home equity loan is right for you? Keep reading for our comparison between the two options.
If you're looking to tap into the equity built up in your home, you've likely come across two popular options: HELOCs and home equity loans. These financing options allow you to borrow against the value of your home, but they have some key differences. We’ll explore the nuances between HELOCs and home equity loans, comparing their features, benefits, and potential drawbacks.
To make an informed decision about which is best for your financial needs, you'll need to understand the distinctions between these two loan types. So, let's dive into the world of HELOCs vs. home equity loans and find out which one might be right for you.
A HELOC,or home equity line of credit, is a revolving line of credit that allows homeowners to borrow against the equity in their homes. Similar to a credit card, it has a predetermined credit limit and a variable interest rate.
Homeowners can draw funds as needed during the draw period, typically 5-10 years, and are required to make interest-only payments during this period. Subsequently, a repayment period follows where the homeowner pays both principal and interest.1
There are various benefits of HELOCs that homeowners may be attracted to. These include:
Despite the benefits, there are still potential risks in choosing HELOCs to access equity. Before settling on a HELOC loan, consider the following:2
In contrast, a home equity loan, also known as a second mortgage, provides a lump sum of money upfront. As the homeowner, you’ll receive the entire loan amount at once and pay it back over a fixed term with a fixed interest rate. Monthly payments include both principal and interest, offering predictability and stability.3
Home equity loans offer a number of benefits to homeowners looking to unlock their equity. These advantages include:
Similar to HELOCs, home equity loans are not without their risks. Potential downsides include:4
Since HELOCs and home equity loans offer different benefits, it’s important to consider what you’re looking for as a homeowner. To help weigh your options, evaluate your goals, the risks involved, and interest rates.
When deciding what financial option is best for you, take into account what your goals are. Are you in need of regular access to funds or a single large payment to cover a specific expense? Analyzing your needs can help you in selecting the choice that best suits your goals.
Evaluate your risk tolerance and ability to manage potential interest rate fluctuations. HELOCs carry the risk of variable interest rates, which may impact monthly payments. Home equity loans, with a fixed rate, provide more stability but may have higher initial costs.
In order to make the most informed decision on your monthly payments, it’s important to consider the current interest rate landscape. If there’s a possibility of a substantial rise in the future, opting for a home equity loan with a set interest rate might be a safer choice.
Ultimately, it’s important to carefully consider your financial situation and goals before deciding between a HELOC loan and a home equity loan.
While HELOCs and home equity loans are popular options for homeowners looking to access the equity in their homes, there is another alternative that may be a better fit for some: sale-leasebacks.
Truehold's Sale-Leaseback allows you to sell your home at competitive price to unlock your equity. Then, you can live in the home you love as a renter and leave it to us to worry about any major home repairs or property insurance. With our sale-leaseback, you can avoid the potential pitfalls of HELOCs or home equity loans while still accessing your hard-earned cash.
Learn more by speaking with one of our advisors today.
Chat with a real person & get an offer for your home within 48 hours.Call (314) 353-9757