When you’re ready to refinance your home, you want to ensure that you’ve chosen the right option for your family. Whether you want to use the proceeds of your refinance to consolidate debt, pay for an emergency, or make home improvements, there’s an option that’s right for you. 

Deciding between a HELOC vs. home equity loan best comes down to your personal needs. 



Home Equity Loan Home Equity Line of Credit
Disbursement You receive a lump sum of cash You can borrow against your line of credit as needed
Repayment You make fixed monthly payments over the loan term You make interest-only payments based on what you borrow during the draw period, then make principal and interest payments during the repayment period
Interest Rates Interest rates are fixed Interest rates are variable
Closing Costs Closing costs range between 2-5% No closing costs
Pros
  • Low, fixed interest rate with a fixed monthly payment
  • You receive your funds as a lump sum
  • If you use the money to remodel or repair your home, the interest could be tax-deductible
  • Only borrow what you need
  • You might be able to claim interest deductions if you use the funds for home improvements
Cons
  • Your home is used as collateral
  • You will essentially have to make 2 mortgage payments each month
  • You will need to pay closing costs
  • Your Interest rate is variable, so it can fluctuate with the market
  • Your home is used as collateral and is in jeopardy if you fall behind on payments

What is a HELOC?

A HELOC, also known as a home equity line of credit, allows you to use your home's equity, similar to a credit card. With a HELOC, you are approved for a credit line of a set amount and have the flexibility to borrow against it over time and repay the funds as you use them. 

Your HELOC will have a draw period, which is usually 10 years. During the draw period, you will make interest-only payments. After the draw period, you will have a repayment period of 10-20 years, depending on your loan, in which you will make principal and interest payments. During the repayment period, you will no longer be able to borrow from your HELOC.

Since you have flexibility with getting money from your HELOC, this option is often better suited for you if you’re unsure how you want to spend the money or don't need all of the money upfront. 

Pros of a HELOC

  • You don’t have to borrow the full amount you’re approved for.

  • There are flexible repayment options.

  • If you use your HELOC funds to make improvements to your home, you might be able to use the interest as a tax deduction.

Cons of a HELOC

  • With a variable interest rate, you aren’t guaranteed a fixed low rate over the length of your HELOC.

  • Your home is used as collateral and can be foreclosed on if you fail to make payments as agreed upon.

When to use a HELOC

There are many ways you can take advantage of a HELOC for your financial needs.  Here are a few ways to use a home equity line of credit. 

  • Fund home remodeling projects: If home repairs or renovations are on the horizon, you can pay for them over time using your HELOC.

  • College tuition: Higher education can be costly, so using HELOC proceeds to pay for tuition might be a good option for you.

What is a Home Equity Loan?

When you secure a home equity loan, you borrow against your home's equity with a low fixed-rate loan. You receive all of your money in one lump sum and pay back the funds over time, generally over 30 years. Your monthly payment will remain fixed over the loan's length so you can easily budget for your monthly payment. 

Pros of a home equity loan

  • Low, fixed interest rate with a fixed monthly payment

  • You can borrow a lump sum instead of receiving your money over time.

  • If you use the money to remodel or repair your home, the interest could be tax-deductible.

Cons of a home equity loan

  • Your home is used as collateral and can be foreclosed on if you fail to make payments as agreed upon.

When to use a home equity loan 

You can take advantage of a home equity loan for your financial needs in various ways. Here are a few options for using a home equity loan.

  • Fund home remodeling projects: If home repairs or renovations are on the horizon, you can pay for them in full using a home equity loan.

  • High-interest debt: Pay down high-interest debt to save on your overall payments.

  • Consolidate debt: Stop making multiple payments each month and consolidate your debt using your HELOC to make one easy payment.

How To Choose Between a HELOC vs. Home Equity Loan? 

Both the home equity loan and HELOC come with their advantages and disadvantages depending on your specific needs. When determining whether you should choose a HELOC vs. home equity loan, here are some points to consider. 

  • Financial Needs: Ask yourself why you need the money. If you need to make a lump-sum payment, then a home equity loan might be best for you, but if you can space out your payments over time, then you might prefer a HELOC. 

  • Budgeting Needs: Consider whether you need a set payment amount each month. A fixed interest rate home equity loan is easier to budget for than a HELOC with variable interest rates. 

  • Timing Needs: If you need all of your money immediately, a home equity loan might suit you best; however, if your needs are upcoming, like paying for college tuition, you can get a HELOC and only borrow when you’re ready. 

If you think a HELOC loan is the best option for you, learn more about what a home equity line of credit is and how it works. 


How a HELOC Loan Works