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The Difference Between a Home Equity Loan and a Home Equity Line of Credit

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The Difference Between a Home Equity Loan and a Home Equity Line of Credit4/9/2021

The COVID-19 pandemic has been a life-changing experience for everyone. Whether you’ve experienced a job loss and need help making ends meet, or you want to renovate your home to add a home office, borrowing from the equity in your house can be an affordable and flexible financing option. Plus, rates have been historically low and home values have risen in response to increased demand. In this article, we’ll explain the differences between Home Equity Loans and lines of credit and help you pick the best option to suit your needs and goals.

 

Home Equity Loan vs. Home Equity Line of Credit - house and coins on a seesaw

What is a Home Equity Loan?

Also known as a second mortgage, a home equity loan is secured by the equity in your home. Your equity is the difference between your current mortgage balance and the market value of your house. Generally, you can borrow up to 80% of your home’s value, so you have to have a fair amount of equity to qualify. At Palisades Credit Union, members may be eligible to borrow up to 100% of their home’s equity. 

Home equity loans usually come with a fixed interest rate and are term loans, meaning you receive a lump sum after closing on the loan and then pay it back, plus interest, in predictable monthly payments over a predetermined length of time.

What to expect from the process of applying for a Home Equity Loan

Applying for a Home Equity Loan is similar to the process you went through to get your first mortgage. Here are the steps:

  • Fill out our online form to start the application process.
  • Provide supporting documents for your application such as proof of income, employment history, recent tax returns, etc.
  • Consent to a credit check.
  • Your house will be professionally appraised to determine market value.
  • A closing day will be scheduled and you’ll receive a rundown of the closing costs associated with your loan.
  • You’ll begin making monthly payments and you may be able to take a tax deduction on the interest paid on your Home Equity Loan (consult a tax professional).

A Home Equity Loan is like a second mortgage - it entails an application process and closing costs. - Couple talking with a mortgage lender

What is a Home Equity Line of Credit?

Often referred to by its acronym, HELOC, a Home Equity Line of Credit is a flexible, revolving credit line secured by the equity in your home. HELOCs come with a variable interest rate and work like a credit card: you get a certain credit limit and can draw from that, make payments, and draw again as needed. You can link your HELOC to your checking account for easy transfers back and forth.

Usually, HELOCs come with a certain draw period, such as 10 years, after which any remaining balance will be converted to a term loan. There may be a penalty for closing the account early. 

At Palisades Credit Union, we’re offering a special introductory rate on our HELOCs. Enjoy 1.99% APR* for the first 6 months!

What to expect from the process of applying for a HELOC

Applying for a HELOC is a slightly different process than a Home Equity Loan. Here’s what you need to know:

  • Fill out our online form to start the application process.
  • Provide supporting documents for your application such as proof of income, employment history, recent tax returns, etc.
  • Consent to a credit check.
  • Your house will be professionally appraised to determine market value.
  • HELOCs don’t have a specific closing date, but there may still be closing costs associated with the credit line.
  • No monthly payments will be due until you make your first draw on the account. You may be able to take a tax deduction on the interest paid on your Home Equity Loan (consult a tax professional).
  • Read the fine print to be aware of any additional fees associated with your HELOC, such as an annual fee, early termination fee, etc.

Learn more about applying for home loans!

A HELOC is a form of revolving credit that allows you to withdraw money and use it how you see fit - Couple looking at kitchen an contemplating renovations

How To Choose Between a Home Equity Loan and a HELOC 

The biggest difference between a Home Equity Loan and a HELOC is how you access your home equity and how monthly payments are calculated.

Accessing Equity Through a Home Equity Loan

Receive the total equity you borrow in an upfront payment with a fixed interest rate. Make monthly payments for a set number of years until the loan is paid off.

Accessing Equity Through a HELOC

Access your equity through a credit limit on a revolving credit line. Borrow what you need, when you need it, and make monthly payments that can fluctuate depending on how much you borrow and how the interest rate fluctuates.

What projects are best to finance with a HELOC or Home Equity Loan?

When choosing between these two types of financing, the biggest question is what you will use your loan or credit line for. Let’s look at a few example scenarios to help you decide

The flexibility of a HELOC may be best for...

  • Relatively small home-related purchases, such as new appliances
  • Debt consolidation (credit card balances and anything else with a higher interest rate)
  • Multiple smaller projects, such as renovating a bathroom and/or other improvements you plan to do over time and without knowing the total amount you’ll need.
  • Using as a financial cushion or emergency fund
  • Financing a new business or side hustle such as house flipping

On the other hand, the lump sum payout and fixed interest rate with a Home Equity Loan offer certain stability that can be helpful with…

  • Financing one large project, such as a complete kitchen renovation or home addition 
  • Consolidation of higher interest debt
  • Large expense such as college tuition or launching a business
  • Buying an investment property or second/vacation home

As you can see, there is some overlap between the two. Overall, a HELOC is best when you don’t know how much you’ll need to borrow or when you want to finance multiple expenses over a period of time. A Home Equity Loan is best when you already know how much you need and have one large expense to finance right now.

Both a Home Equity Loan and a HELOC let you borrow against your home's equity.

 

How Much Can You Borrow with a Home Equity Loan or HELOC?

As mentioned earlier, Palisades CU members may be eligible to borrow up to 100% of their home’s equity (the difference between what you owe on your mortgage and what your home could sell for). For example, let’s say your home’s value is $200,000 and you currently have a mortgage balance of $125,000. That would mean you have $75,000 in equity and would be eligible to borrow up to $75,000 with a home equity loan or HELOC from Palisades. You don’t have to borrow the full amount if you don’t want or need that much. 

Use our loan calculator to test out different amounts and monthly payments.

Apply for a Home Equity Loan or HELOC from Palisades!

Ready to tap your equity to renovate your home, help your child pay for college, and more? Contact us with questions about home equity loans and lines of credit or apply online today!

Home Equity Loan - fixed interest rate, full amount is advanced up front, BOTH - secured by your home HELOC - revolving line of credit, variable interest rate/ Consider HELOC if: you prefer a loan with a fixed monthly payment, you want to consolidate debt. Consider Heloc: for unexpected expenses or emergencies, you want cash for an ongoing project, you want a safety net

*APR – Annual Percentage Rate 



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