HELOCs vs. Home Equity Loans

  • Home Equity Loans & HELOCs
For many homeowners, the equity they’ve built in their homes is more than just a source of pride. It’s also a potential source of collateral for a pair of specialized loans: Home Equity Loans and Home Equity Lines of Credit (HELOCs).

Each gives the homeowner access to money they might need for renovations, college payments, or any of the other major expenses found on a budget. But they’re also different from each other in important ways.
Young couple doing home project

Home Equity Loans

Equity is the difference between a home’s value and what’s left to pay on the mortgage. That's why using a home as collateral for this kind of loan can be referred to as a second mortgage. 

A home equity loan:

  • Uses a home’s equity as collateral for a one-time, lump sum disbursement
  • Has a fixed interest rate, often similar to that of a traditional mortgage
  • Common uses: One-time needs with known costs up front, like a tuition payment

Home Equity Loans are often used for costs with fixed amounts up front. And since the interest rate doesn’t change, the payments don’t either.

A+ Tip: Use the Affinity Plus personal finance calculators to see what payments could look like and what your budget could handle.


Home Equity Lines of Credit (HELOCs)

A HELOC is a line of credit that uses a home’s equity as collateral. Instead of a lump sum, a HELOC provides a rotating line of credit for a pre-approved amount that, once used and paid off, becomes available to the homeowner again.

HELOC specifics include:

  • Paying back principal and interest only on the amount of credit you use, not the maximum borrowable amount
  • Variable interest rates, meaning the rate can fluctuate over time
  • Common uses: Needs that require access to these funds at different times, like an evolving home-renovation project
  • With a maximum borrowable amount but not a requirement to use all of it, a HELOC is a loan option for when access to cash is needed but the amount isn’t yet fixed

Other Considerations

Using a home’s equity as collateral means it’s a secured loan so it will likely have a competitive interest rate, but it also means risking ownership of the home if loan repayment falls short.

There will also be closing costs involved in both loans, and the repayment term length usually differs between the two loan options.


Which option's right for you?

When choosing between a HELOC or a home equity loan, there’s plenty to consider:

  • What kind of project or cost is it? 
  • How long will you need the money? 
  • Do you have a fixed cost in mind, or a ballpark figure?
  • Are you planning on moving soon?

You can also contact us at Affinity Plus for guidance on your specific situation!

A+ Tip: For more considerations, Investopedia has a good pros and cons list comparing the 2 loan options, and NerdWallet has a simple HELOC calculator.

Related articles