Differences with Home Equity Loans and Home Equity Lines of Credit
As a homeowner, you’ve likely heard about “tapping into your home’s equity.” This can be done in a few ways, but two common options include a home equity loan or home equity line of credit (called a HELOC for short). These two terms may sound like the same financial product, but they impact your home’s equity in different ways.
If you’re curious about the differences between home equity loans and home equity lines of credit as a homeowner in Indiana or elsewhere, then let’s take a closer look.
What is a Home Equity Loan?
A home equity loan, also known as a second mortgage, provides a lump sum of money that you repay in fixed monthly payments over a set term, typically 5 to 15 years. This type of loan functions like a traditional mortgage, with a fixed interest rate and predictable payments. Like a mortgage, your home is the collateral.
A home equity loan offers a few advantages many homeowners prefer including the predictability of a fixed interest rate and payment. The one time lump sum funding can help you with large expenses such as home renovations or debt consolidation. Plus, you know your payment will remain constant until it’s paid off.
Borrowing a home equity loan means only receiving one lump sum payment though, which means if you need more funding then you’ll have to apply for another loan.
What is a Home Equity Line of Credit (HELOC)?
Like a home equity loan, a HELOC lets you as a homeowner borrow against your home’s equity. However, a HELOC works more like a credit card, giving you access to a revolving line of credit, versus a lump sum payment up front. You can borrow funds as needed during the draw period, usually 5 to 10 years, and repay during the repayment period, which typically lasts 10 to 20 years.
A HELOC offers noteworthy advantages too, including tremendous flexibility. You only borrow what you need and when you need it, so you can work in smaller increments or plan for large expenses. Typically you only pay interest during the draw period too, which means lower initial costs. Like a home equity loan, you can use it for a variety of expenses, from home repairs or a new car, to consolidating high-interest debts or medical bills.
However, HELOCs often include variable interest rates, so your rate and payment may increase over time. This can make borrowing with a HELOC more expensive over time compared to a home equity loan, while requiring careful budgeting discipline so you don’t overspend.
Whether you decide a home equity loan or a HELOC in Indiana is the right move for you, Farmers Bank has you covered. We offer both options with competitive interest rates and a variety of repayment terms. Contact the Farmers Bank today for more information.