What’s the difference between a home equity loan and a HELOC?
- Home equity loan: A one-time loan based on the amount of equity you have in your home with set monthly payments and a specific payoff date.
- Home equity line of credit (HELOC): A revolving line of credit, based on the amount of equity you have in your home, that functions more like a credit card.
Homeowners often use one-time home equity loans to finance planned expenses such as major repairs or renovations. Similar to a personal loan, you borrow a lump sum with a fixed interest rate, fixed monthly payments, and a scheduled pay-off date.
On the other hand, because a HELOC is a line of credit, as a borrower you can generally decide how much of that credit to use and when to use it. Like a credit card, your available credit will replenish up to the original credit limit as you repay what you’ve borrowed. While HELOCs offer you more flexibility, you must also be careful not to misuse the line of credit, just like with a credit card. Manage a HELOC responsibly, as you would any other revolving line of credit, to ensure it serves you in a way that improves your financial confidence and well-being.
For a big expense, a home equity loan or line of credit may offer a lower interest rate than credit cards or personal loans, though interest rates and terms will vary based on your unique situation and credit history. Keeping your credit score above 720 can help you get favorable terms, which should effectively lower the cost of borrowing. If your credit score isn’t quite there, making consistent on-time mortgage payments is just one way to raise it.
![Home equity {hohm ek-wi-tee] noun; The difference between the value of your home and the amount you owe on your mortgage. You home's value: $220,000; Your mortgage balance: $120,000; Your home equity: $100,000.](/content/dam/truist-bank/us/en/infographic/tl/movement/home-equity-infographic.jpg/jcr:content/renditions/original)
