HELOC and HELOAN, both are used to borrow money against one’s home’s equity. However, their working, interest rates, and structure of repayment terms are completely different. Be it a home equity line of credit or a home equity loan, both can be used for assisting major life events such as home renovations, medical emergencies, educational costs, starting a new business, etc.
In this article, we’ll shed light on how HELOC is different from HELOAN and which one is a better option to go with. Here are a few ways a home equity line of credit is different from a home equity loan.
Specified Borrowing Period
HELOC has a specified borrowing period in which you can withdraw money as little or as much as you need upto your approved credit line limit. The borrowing period is typically ten years. In addition, you can use funds and continue to use them as you repay the outstanding balance.
On the other hand, in a home equity loan you can withdraw a one time loan against your home’s equity which is then repaid over a fixed period of time.
Interest Rate
In HELOC, the interest rate is variable and fluctuates according to the market rate during the repayment period. Also, you pay for interest only on the money you have used. In addition, home equity lines of credit can be opened ahead of time to cater to a certain financial need and make funds available.
On the other hand, home equity loans offer a fixed interest rate that doesn’t change during the life of the loan. Also, HELOAN can’t be applied for a future event as it’s a one-time loan payment.
Flexibility in Structure
A home equity line of credit by Amerisave comes with more flexibility in its structure. You can borrow, spend, repay, and again borrow the money up to your approved credit line limit just like a credit card. It makes funds available again if you repay the outstanding balance. Once the borrowing period ends, you can repay the remaining amount with interest. The repayment period usually lasts 10 to 20 years.
On the other hand, HELOAN is a one-time loan that is paid back with a fixed interest rate in a repayment period with regular payments.
Which One is Better For You?
A HELOC and HELOAN both can give access to funds at the time of need. The loan is given against one’s home equity. If you are looking for a one-time upfront payment, then HELOAN can be a better option. It has a conventional loan structure with a fixed interest rate and can be repaid with regular monthly payments.
On the other hand, if you are looking for available funds for major life events such as home renovations, medical emergencies, educational costs, or for a startup, HELOC can serve you better due to its flexibility in structure and repayment terms.
However, with either, the amount you can borrow depends on your home’s equity. It’s important to remember that you are using your home as collateral, any reluctance in repayment could put your home at risk.
