HELOC vs Home Equity Loan: What’s the difference?

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Unlock the value in your home through home equity loans or home equity lines of credit (HELOCs). Understand the differences and your options for borrowing.

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Overview of HELOC and Home Equity Loans 

HELOCs and home equity loans operate differently, but both use the equity in your home as collateral to help you secure funds to support a home renovation, higher education, an emergency expense, or to consolidate high-interest debt.

Equity measures the market value of your home compared to your mortgage. For example, if your home is worth $400,000 and your mortgage balances are $200,000, you have $200,000 or 50% equity in your home. Equity usually builds over time as you pay your mortgage or improve the value in your home and is key to securing a HELOC or home equity loan.

Both HELOCs and home equity loans can be practical borrowing options for homeowners because they typically have better interest rates compared to personal loans, credit cards, or other unsecured loans. That said, there are risks that come with HELOCs and home equity loans, so it’s crucial for homeowners to understand how each loan works.

Watch the video to understand the high-level differences between a home equity loan and HELOC.

What is a home equity loan?

Home equity loans are usually fixed rate, fixed term installment loans that use your home as collateral. You’ll apply for a specific amount of money with a lender and, if approved, you’ll receive the lump sum up front.

For this reason, home equity loans could be a good option for homeowners that know exactly how much money they need to borrow and when they need it. For example, if you’re planning to remodel your kitchen and know that you’ll be paying for the project in full under a tight timeline, it likely makes sense to have a large amount of money at your disposal.

How does a home equity loan work?

If you’re approved for a home equity loan, you’ll receive the entire loan amount soon after approval to put toward your home renovations, debt consolidation, or whatever expenses you and your lender agreed upon.

Once you obtain the money, you’ll begin to repay the loan in fixed monthly installments. The life of a home equity loan is usually between 3–20 years but can vary based on your needs. Each time you make your monthly payment, a portion of that money goes toward the principal, or original loan amount, as well as interest accrued.

With home equity loans, you usually have a fixed interest rate. This means throughout your loan, you’ll always have the same monthly payment and interest rate, which can be helpful for budgeting and financial planning.

Home Equity Loan Calculator

Try our home equity loan financial calculator if you’re considering a home equity loan to consolidate high-interest debt. Use this digital tool to help you compare your current monthly payments to what your monthly payment and savings could be with a home equity loan.

Things to Consider Before Getting a Home Equity Loan

The decision to apply for a loan is a big one, especially when using your home as collateral, so be sure to thoroughly consider the benefits and risks of a home equity loan.

Advantages of Home Equity Loans

  • Receive the loan in a lump sum: If you’re pursuing a project that requires payment up front or have an unexpected financial emergency, a home equity loan could help you cover a large cost.
  • Interest could be tax deductible: According to the Internal Revenue Service (IRS), the interest on a home equity loan may be tax deductible if the money is used on home renovations that raise the home’s value, or if the loan is used to purchase a second home. Please consult your personal tax advisor.
  • Lower interest rates: Interest likely won’t be lower than your first mortgage, but because your home is used as collateral, you can get a lower interest rate compared to unsecured loans, saving you money in the long run.
  • Fixed interest rates: Since home equity loans usually have fixed rates, the interest rate you receive is likely the interest rate you’ll keep through the life of the loan, creating predictable payments each month.

Drawbacks of Home Equity Loans

  • You could risk foreclosure: With a home equity loan, your funds are secured through the equity in your home. This gives your lender a lien, or legal claim, over your home. If you default on your loan or can’t make payments, the lender can begin the foreclosure process and you could lose your home.
  • You need good-to-excellent credit: Because you offer collateral, it’s still likely you’ll receive a lower interest rate compared to unsecured loans, but the best interest rates will often go to applicants with the best credit qualifications.
  • You need considerable equity in your home: Depending on the amount of money you are seeking and the lender’s maximum combined loan-to-value ratio, the equity required to qualify for the loan may be substantial.

Unlock the value in your home with Huntington

Choose from home equity loans, first mortgage equity loans, or home equity lines of credit to help you renovate, or remodel, pay tuition, or consolidate debt. Whatever your plans, Huntington can help with mortgage options, equity options, and more to help you achieve your goals.

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What is a home equity line of credit?

A HELOC is a revolving credit line, similar to a credit card. You’ll apply for the line of credit with a lender and, if approved, you’ll be able to access money any time during your draw period, up to a preset limit. HELOCs can be helpful if you don’t know exactly how much money you need or if you want to be prepared to pay down variable expenses. If you’re planning a large project and can spread out expenses over the course of a full year, a HELOC could make sense because you’re able to take out funds as you need them.

How does a HELOC work?

If you’re approved for a HELOC, you’ll have access to a revolving line of credit to borrow against your preset limit, repay a portion or all of your balance, and repeat the process. With a HELOC, the loan operates in two phases. First, you’ll enter a draw period. Draw periods can last up to 10 years, however this can vary depending on the terms of your specific loan. During the draw period, you’ll have unlimited access—up to your present limit—to spend the money as you choose. You’ll likely have to pay an interest-only payment during the draw period, but you won’t be required to pay on the principal until the draw period ends.

After the draw period, you’ll enter phase two, which is repayment. You can no longer make any withdrawals using this HELOC and you’ll now make regular payments on both the principal you owe and interest, causing your monthly payment to increase significantly compared to the interest-only payments made during the draw period.

HELOCs usually have an adjustable interest rate, meaning that as the market rate fluctuates, the interest rate on your HELOC will, too. This can make it difficult to budget each month.

HELOC Calculator

Try our HELOC financial calculator if you’re considering a HELOC to consolidate high-interest debt. Use the digital tool to help you compare your current monthly payments to what your monthly payment and savings could be with a HELOC.

Things to Consider Before Getting a HELOC

HELOCs could be a great option for homeowners because it allows you to spend money as you need it, but like home equity loans, it’s important to understand the advantages and drawbacks of HELOCs.

Advantages of HELOCs

  • Interest may be tax deductible: Like home equity loans, the interest on a HELOC may be tax deductible if the money is used on home renovation’s that raise the home’s value. Please consult your personal tax advisor.
  • Lower interest rates: Using your home as collateral could qualify you for lower interest rates compared to unsecured lines of credit, like credit cards.
  • Only borrow what you need: Home equity loans require you to take out a lump sum upfront, but with HELOCs, you have the flexibility to spend what you need, when you need it.
  • HELOCs could raise your credit score: There are multiple factors that affect your credit score, including payment history and credit mix. Adding a HELOC to your portfolio diversifies the types of credit you have and making on-time payments demonstrates financial responsibility, which could increase your credit score.

Drawbacks of HELOCs

  • You could risk foreclosure: Whether you choose a home equity loan or a HELOC, using your home as collateral is a risk because if you fail to make payments, you could lose your home.
  • Adjustable interest rates: Since HELOCs typically have adjustable rates, this can make it difficult to accurately budget because you may not be able to predict your payment month to month. With an adjusted interest rate, your interest rate and payment will increase, or decrease based on market interest rates.
  • It could be easy to overspend: HELOCs have a draw period that could be up to 10 years. During this time, you’re only required to make interest-only payments while you have unlimited access to your credit line. If you don’t have a strong budget or plan for these funds, it could cause some borrowers to use more money than they need without considering how that could affect their payment when the draw period ends. That means after the interest-only draw period, the payment during the repayment period could increase significantly to repay principal and interest.

The bottom line: Which equity option is right for me?

Using the equity you’ve worked hard to build to fund home renovations or achieve a personal goal is rewarding, but it’s tough to know which borrowing option is right for you. Home equity loans allow you to receive the loan amount upfront and offer predictable, fixed monthly payments, while HELOCs allow you to spend the money that you need, exactly when you need it. Both are helpful in specific circumstances, and both come with risks and could lead to foreclosure if you default on the loan.

At Huntington, we’re here to help you reach your financial goals. Before choosing between a home equity loan or HELOC, be sure to speak with a lending specialist at (800)480-2265 or come see us at your local Huntington branch. If you’re ready to take that next step, start our HELOC online application or our home equity loan online application today.

Related Content

IRS. February 2018. “Interest on Home Equity Loans Often Still Deductible Under New Law.” Accessed June 20, 2023. https://www.irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law. Please consult your personal tax advisor. 

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All lending products are subject to application and credit approval. Home equity loans and lines also subject to acceptable appraisal and title search. Loans and lines over $750,000 may require title insurance.

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