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When to Choose a HELOC Over a Home Equity Loan

When you're in need of extra money for a renovation or another large expense, borrowing against your home is a natural choice. Yet the best way to accomplish this isn't always obvious. For most people, it's a process that boils down to two options: A home equity loan or a home equity line of credit (HELOC).

To help you make the best choice, let's take a closer look at both approaches.

Home Equity and HELOC Basics

Home equity loans and HELOCs are lending products where the borrower taps into the equity of her home and uses the home as collateral to secure the loan. These loans are typically used to finance major projects or purchases: Think renovations, college costs, etc.

The fundamental difference between the two is that with a home equity loan, the borrower receives a lump sum payout. Under the terms of a HELOC, the borrower has access to a rolling line of credit, and can take as much or little as they like.

With the former, payments are stable and predictable and interest rates are typically fixed. Because the amount of money being borrowed under a HELOC is subject to change, and because interest rates are variable, monthly payments too, can change.

Why choose a HELOC?

Perhaps the most appealing feature of a HELOC is flexibility -- you can borrow only as much as you need. A HELOC also makes sense if you believe you'll need multiple large purchases or renovations, or if your renovation is likely to be quite extensive, requiring several payments over time.

Other Pros and Cons

Choosing a HELOC can save you money, as you pay interest only on the amount of money you draw, rather than the total amount of credit available. Interest paid is also typically tax deductible.

It should be noted that because it's possible to overspend with a HELOC, as you'll have the temptation of easy access to cash. While interest rates on HELOCs are generally lower than a fixed-rate home equity loan initially, they can rise over time.

In conclusion

Home equity loans and HELOCs both offer significant benefits, but a HELOC is the smarter approach if it's likely you'll need to make multiple withdrawals from your equity over time.

If you're interested in either product, please don't hesitate to contact KeyPoint Credit Union. You can fill out an application online, and get fast access to the money you need.