Interest HELOC – HELOC vs. Home Equity Loan

This is always a question when someone wants to tap into his or her Home Equity. You have two major home equity options for borrowing money: the home equity loan and the home equity line of credit (HELOC). Both options allow homeowners to take out a loan based on the existing equity in their property. In both cases, the property is used as collateral and may be foreclosed upon should the borrower default on the loan.

Home Equity Loans
Home equity loans are given out in a single lump sum. The borrower walks away with a check for the total amount. Home equity loans have a fixed interest rate for the life of the loan – the borrower knows exactly how much his monthly payments will be ahead of time. Home equity loans are often a smart choice for borrowers who need upfront money for expenses such as credit card debt consolidation or a huge medical bill.

Home Equity Lines of Credit (HELOC)
A home equity line of credit (HELOC) is similar to a credit card. Instead of being handed a single lump sum amount, a borrower can withdraw from the line of credit whenever they wish to withdraw money. HELOC’s generally have a set draw period between 5 and 10 years. After the draw period, the borrower must either pay back the balance in full (a balloon payment) or enter a 5 to 10 year repayment period. HELOCs have variable interest rates generally tied to the national prime rate. That means, a borrower’s monthly interest charges may change from month to month. HELOCs are often a smart choice for borrowers who want to have a reserve for emergencies or need money for ongoing projects such as home renovation.

A simple Comparison Chart
Home Equity Loan
Closing costs is normally in several hundred dollars.
Fixed interest rate for life of loan.
Loan is paid back via equal monthly payments like a regular loan.
Interest is charged on entire amount of loan.
Interest is tax deductible in most cases Interest is tax deductible in most cases

HELOC
Very low or no closing costs
Variable interest rate, changes regularly.
Loan can be paid however the borrower wants to during the period of the loan but is generally paid back in a single balloon payment or 5-10 year repayment period.
Interest is charged only on the money withdrawn.
Interest is tax deductible in most cases

Choosing a Loan
Both HELOCs and home equity loans have their own pros and cons. The best loan for you is determined based on your needs. Take into consideration what the money is needed for, as well as your financial ability to deal with variable rates.