What is the Difference Between HELOC and Home Equity Loan

Whether it’s for home improvements or an unexpected emergency, you may find yourself applying for a home equity line of credit or home equity loan to get some extra cash. Both HELOCs and home equity loans leverage your home equity to get you cash, but they don’t work in exactly the same ways.
 

So what’s the difference between a home equity loan and a HELOC, and which one is right for you?
 

What is a home equity line of credit?
A home equity line of credit, or HELOC, is exactly what it sounds like: a line of credit for which the lender uses the equity on your home as collateral.
 

A HELOC works similarly to a credit card, but generally with lower interest rates. This option gives you the flexibility to tap into your home’s value only as needed, rather than receiving a lump sum. Use the money as you wish, up to your maximum amount, and only pay interest on the amount you withdraw. You typically also have the option to make interest-only payments for a specific time period.
 

Advantages of a HELOC

• Generally low interest rates—lower than many credit cards. If you have some big credit card bills, you may opt to pay those off with a HELOC, replacing higher interest rates with a lower one.
   

• Interest may be tax deductible. If your debt is lower than the fair market value of your home, up to $100,000 may qualify for a tax deduction. 
   

• Great for debt consolidation. If you have debt on multiple credit cards, you can pay them off all at once with a HELOC, leaving you with one monthly payment instead of several.
   

• Bad credit? No problem. Whether you qualify for a HELOC depends more on your home equity than on your credit score.
   

Risks of a HELOC

• Adjustable interest rate. Rising interest rates could increase your payment.
   

• Easy to overspend. If you’re not disciplined, you could tap out the equity in your home and have a lot to pay back during the repayment period.
   

• If you can’t pay back your HELOC, you may need to sell your home.
   

What is a home equity loan?
A home equity loan, or HELOAN, uses the equity of your home as collateral on a loan, providing you with one lump sum of money rather than a line of credit you can pull from periodically. It’s essentially a second mortgage—you get the loan all at once, then pay it back in monthly payments made up of interest and principal.
 

Advantages of a HELOAN

• Fixed-rate loan. Find comfort knowing that your interest rate won’t go up during your repayment period.
   

• Like a HELOC, your interest may be tax deductible for loan amounts up to $100,000.
   

Risks of a HELOAN

• Higher interest rates. Because a home equity loan provides the security of a fixed-rate loan, the interest rates are generally higher than that of a HELOC for the same amount.
   

• Somewhat risky. What’s the housing market like where you live? Tying up all your home equity may be problematic if property values in your area decline.

Apply for a home equity loan or home equity line of credit from Mountain America Credit Union by visiting your nearest branch or calling 1-800-748-4302.