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Home Equity Loan vs HELOC: What’s Right For You?

Photo of Home and Bag of Money on a Balancing Scale to Compare the Two of them.

You’ve probably heard the terms Home Equity Loan and Home Equity Line of Credit (HELOC) on a television commercial or in an email from your bank. But what is “home equity,” anyway?

Simply put: home equity is the difference between your home’s fair market value and what you owe on it. So if you estimate that you could get $500,000 if you sold today and you still owe $200,000 on your mortgage, that’s a whopping $300,000 worth of equity.

The problem is that until you sell, you can’t use your home equity. Money locked up in your home isn’t liquid, so you can’t invest it or buy things with it. What happens if you need some of that money for a major purchase or emergency?

Fortunately, there’s a solution: you can borrow some of your home equity. That’s where a HELOC or home equity loan comes in — using the property as collateral, a financial institution may loan you up to 85 percent of the equity in your home. Because they’re backed by your property, these loans often come with a lower interest rate than unsecured personal loans. Keep in mind that you still need to have steady income, a good credit score, and a reasonable amount of other debt in order to qualify for the loan. After all, they want to make sure you can afford to pay it back.

But beyond the basics, it’s easy to get confused by the difference between the two types of loans. Home equity loan and home equity line of credit sound similar, so it’s important to know exactly what separates them so you can choose the one that’s right for your personal needs.

Home Equity Loan:

This is a straightforward loan, similar to a personal or auto loan. You fill out an application, submit your financial information, and then your bank uses that information to decide how much they’re willing to loan you. You’ll receive the money in a lump sum, and you can start spending it whenever and however you want. Just like with your mortgage, your home equity loan has a set term (say, 15 years), and you start making monthly payments immediately. These loans are best when you have a specific expense to pay off, so they could be a good fit if you want to redo your kitchen or consolidate your debts at a much lower rate.


Unlike a regular loan, a line of credit isn’t a set amount — it’s more like a credit limit. During a set “draw period,” you can use as much or as little of the money as you want, up to the maximum you’re approved for. In this period (typically around 10 years), you generally only pay interest. Then comes a repayment period, when you make monthly payments to pay off the principal you borrowed. A major advantage of HELOCs is that they often start with an even lower rate than home equity loans; however, the rate is usually variable, so it can go up if the prime rate goes up over the life of the loan. A HELOC may be right for you if you have a sudden financial emergency and don’t know how much money you’re going to need to borrow.

At Equity Bank, we finance home equity loans and HELOCS to help you access the money you need when you need it. Get in touch with us today for answers to all your questions, and we’ll work to find the right loan terms for you!