Home equity is the part of your home that you truly own. It’s the difference between what your house is worth and what you still owe on your mortgage. As you make payments over time and your home’s value increases, your equity grows, like slowly building up savings in your home that you can borrow from later on.
When it comes to borrowing against the value of your home, two common options are a Home Equity Line of Credit (HELOC) and a Home Equity Loan. Both allow you to tap into the equity you’ve built, but they work in different ways. Understanding the basics can help you decide which might be the right fit for your needs.
Comparing Your Home Equity Options
Both a HELOC and a Home Equity Loan are secured by your home, meaning you’re borrowing against the part of your house that you truly own. Because they use your home as collateral, they typically offer lower interest rates than personal loans or credit cards, making them a potentially affordable way to finance larger expenses.
| Feature | Home Equity Loan | HELOC (Home Equity Line of Credit) |
|---|---|---|
| How funds are received | One lump sum upfront | Borrow as needed from a credit line |
| Interest rate | Usually fixed | Usually variable (can change over time) |
| Payments | Fixed monthly payments | Payments vary depending on how much you borrow and interest rates |
| Best for | One-time large expenses (e.g., renovations with predictable costs, medical bills, debt consolidation) | Ongoing or unpredictable expenses (e.g., tuition over several years, multiple home projects) |
| Predictability | Very predictable with set payoff schedule | More flexible, but less predictable |
| Repayment | Starts immediately | Draw period (borrow as needed) followed by repayment period |
HELOCs: Draw Period & Repayment Period
A HELOC has two (2) main phases: the draw period and the repayment period.
- Draw period: This is the time when you can borrow from your HELOC, usually 5 - 10 years. You can take out money as you need it, up to your credit limit, and you typically only pay interest on the amount you use. Think of it like having a flexible credit card tied to your home.
- Repayment period: After the draw period ends, you enter the repayment period. You can no longer borrow, and now you start paying back both the principal (the amount you borrowed) and the interest. Payments may increase during this period, especially if your HELOC has a variable interest rate, so it’s important to plan ahead.
| Feature | Draw Period | Repayment Period |
|---|---|---|
| Timing | First 5 - 10 years of loan. | Follows the draw period. Length varies, typically 10 - 20 years. |
| Can I make withdrawals? | Yes, you can borrow as needed from your credit line (up to your limit) | No, withdrawals are not allowed. |
| Repayment | Interest-only payments | Both principal and interest payments |
Choosing the Right Home Equity Solution
The right choice depends on your goals. If you know exactly how much money you’ll need and want a consistent monthly payment, a Home Equity Loan might be the better option. If you prefer flexibility and may need to borrow at different times, a HELOC could give you the breathing room you want.
Want to talk about your home equity options?
This information is provided for educational purposes only and should not be considered legal advice. Product details, including rates and terms, are for illustration purposes only. Terms, conditions, and features referenced in this article reflect what was generally available to consumers in the market at the time of publication and are subject to change. Actual products and services offered by Prime Financial Credit Union may vary from those in this article. Terms and conditions apply to products, services, and promotions offered by Prime Financial Credit Union; speak to a representative for details. All applications are subject to review and approval.
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