As a homeowner, you can use the equity in your home to get extra cash for big expenses like home renovations or paying off debt. A Home Equity Line of Credit (HELOC) and a home equity loan are two options that allow you to borrow money against the equity in your home, but each one functions differently and suits different financial situations. Understanding these differences can help you make an informed decision that best fits your needs.

What is Home Equity?

First, let’s talk about home equity. Home equity is the portion of your property you truly own, which can be calculated by subtracting any outstanding balance on your mortgage from your home’s current market value.

For example, if your home is worth $500,000 and you owe $300,000 on your mortgage, your equity is $200,000. Depending on your credit history, lenders will typically allow you to borrow you up to 85% of your home’s equity. In this example, that means you could borrow up to $170,000. You can also use our free online home equity calculator to determine how much equity you have in your home.

What is a Home Equity Loan?

A home equity loan is sometimes referred to as a second mortgage because you’re basically opening a second loan, like you did to originally purchase your home, however; with a home equity loan you’re actually borrowing money against your home’s equity. Here are the key characteristics of a home equity loan.

Lump Sum
Disbursement When you take out a home equity loan, you get the entire loan amount upfront in a lump sum. This can be beneficial for bigger, one-time expenses such as home renovations, medical bills or consolidating high-interest debts.

Fixed Monthly Payments
Home equity loans typically come with a fixed interest rate, meaning your monthly payments will remain the same throughout the life of the loan. This predictability can make budgeting easier.

Repayment Term
The repayment period for a home equity loan is generally set, often ranging from five to 30 years. You’ll start repaying the loan immediately after receiving the lump sum.

What is a HELOC?

A HELOC works more like a credit card than a traditional loan. It’s a revolving line of credit that allows you to borrow money against the equity in your home, for a specific period of time. Because a HELOC is backed by a valuable asset, your home, it’s considered secured debt, which means you’ll generally get a lower interest rate than you would with unsecured debt, like credit cards or personal loans. Here are the key characteristics of a HELOC.

Revolving Credit
A HELOC provides a revolving line of credit that you can draw from as needed, up to a certain limit, during a specified draw period (usually five to 10 years). You only borrow what you need, when you need it, and you can repay and borrow again, much like a credit card. This makes a HELOC beneficial for ongoing or unpredictable expenses like a home renovation project or college tuition. It’s good for situations where you want flexibility in the amount you need to borrow and how often you want to borrow.

Variable Interest Rate
HELOCs usually have variable interest rates, which means the rate can change over time based on market conditions. Whie this can result in lower initial rates; it also means your monthly payments could fluctuate.

If you prefer more predictability in your payments, there are a few lenders who do offer a fixed-rate HELOC, including Partner Colorado. A HELOC from Partner Colorado also features no closing costs.*

Draw and Repayment Periods
During the draw period, you can borrow as much or as little as you need up to your credit limit. After this period, the repayment period begins (usually 10 to 20 years), during which you can no longer borrow and must start repaying the principal and interest.

Both a home equity loan and HELOC have advantages to consider. If you prefer predictable monthly payments and need a specific amount for a one-time expense, a home equity loan might be your best choice. If you need flexibility and access to funds over a period of time for various expenses, a HELOC might work better. Understanding the difference between the two will help you use your home’s equity more efficiently.

^*No closing costs in most cases. An upfront appraisal fee of $450.00 may be required at member expense on loans greater than $75,000 or loan-to-value exceeding 70%. Refinancing a present loan held by Partner Colorado Credit Union is excluded from this offer. Closing costs include settlement fees, flood determination fee, title search, government fees and recording charges, taxes, and when required, appraisal fees, title insurance and any fees associated with condominium properties; no closing costs on HELOC subject to change anytime without notice. For loan amounts up to $250,000, closing costs typically range between $250 and $1,800. Closing costs depend on the location of the property, property type and the amount of the Equity Line.