Home Equity Loan vs. HELOC: 5 Factors to Consider.

By Lindsey Meyer – AVP, Personal Lender | Estimated read time: 4 minutes

Home Equity Loan or Line of Credit: What’s the Difference?

A home equity loan is similar to a regular personal loan. You borrow a lump sum and pay it back in monthly payments over time.

However, a HELOC works more like a credit card, but with better interest rates. You can borrow money up to a set limit and only pay interest on what you use. Then you begin repaying both the principal and interest – giving you flexibility to cover a variety of different expenses.

Both options use your home as collateral to convert equity into cash. This money can be used for various purposes, such as:

• Home improvements
• Debt consolidation
• Medical expenses
• Emergency costs
• Education
• Starting a business
• Travel
• Wedding expenses

Home equity loans and HELOCs can both be great tools. But how do you know which one is right for your needs? There are some basic things to think about when making your choice.

1. How much (and how long) you want to borrow

   If you need a large, one-time sum for something like a home renovation, a home equity loan might be a better choice. It provides a fixed amount of cash with predictable payments, making it well-suited for long-term projects. At Gate City Bank, we offer home equity loan terms ranging from five to 30 years, depending on the type and amount of the loan.

   On the other hand, if you need a smaller amount or want more flexibility to borrow as needed, a HELOC may be a smart option. It allows you to borrow up to a set limit whenever necessary, making it ideal for expenses like medical bills, education or unexpected costs.

2. Interest rates

   Home equity loans usually have fixed interest rates, so your payments stay the same. This makes it easier to budget. HELOCs typically have variable rates, meaning your payments can go up or down depending on the market.

   If you want steady payments, a home equity loan might be better. But if you’re okay with changes in payments, a HELOC could work for you.

3. Fees and costs

   Fees and costs are also important to consider when choosing between a home equity loan or a HELOC. Home equity loans often have lower fees, but you might have to pay for closing costs and appraisals, which can add up. HELOCs may have fewer upfront costs, but they could come with annual fees, transaction fees or fees for using the credit line.

   It’s worth noting that interest on home equity loans and HELOCs may be tax-deductible, depending on how the funds are used. Be sure to keep records of the loan and consult a tax professional for guidance.