What’s the Difference Between a Home Equity Loan and a HELOC?

Many people think a home equity loan and a home equity line of credit are the same thing. They’re similar, but they aren’t exactly the same. Learn the difference between home equity loans and home equity lines of credit from the experience team at Integrity First Lending of Utah.

What Is a Home Equity Loan?

A home equity loan is money you borrow against the equity in your home. Many homeowners think their home equity is equal to the amount they have paid thus far on their mortgage, but that’s not exactly how your home equity is determined.

Let’s say you put $20,000 down 10 years ago on a $300,000 home and since then you have paid in $80,000. That’s $100,000 in home equity, right? Not necessarily.

When you first begin paying your mortgage, more of each payment goes to interest than principal, so the amount you owe will appear to shrink more slowly than you might have thought.

However, it is likely your home has increased in value in the last 10 years. If you have made home improvements, it may have increased even more. So you may have more than $100,000 in equity in your home. You may be asked to get an appraisal to determine the exact value of your property.

With a home equity loan, you can usually borrow up to 80% of the value of your home and use it for anything you like — home improvements, college tuition, debt consolidation or even a vacation.

What Is a Home Equity Line of Credit?

When you are approved for a home equity loan, you get the amount in a lump sum. When you’re approved for a home equity line of credit, you are given access to a certain amount of money for a predetermined period of time.

One advantage of a HELOC over a home equity loan is that you can take out only as much money as you need at a time, rather than one large lump sum. This may help prevent you from overspending. However, interest rates on HELOCs are variable, while interest rates on home equity loans are fixed. A variable interest rate can sometimes impact your budget negatively when rates change.

In a way, a HELOC is a bit like having a credit card. You have a fixed amount you are allowed to spend anytime on anything you want. One important difference is that if you find yourself unable to pay back the money you withdrew with your HELOC, your lender could sell your home in order to get their money back. When you use a credit card, that loan is unsecured. That’s why the interest rates on credit cards over time are astronomical.

Home Equity Loans from Integrity First Lending

If you’re not sure if a home equity loan or a HELOC would be better for your situation, talk to the experts at Integrity First Lending of Salt Lake City, Utah. We’ll run the numbers for you so you’ll have the information you need to make the right decision for you.