What’s the Difference Between a HELOC and a Home Equity Loan?

When facing a major expenditure, a homeowner can use a HELOC payment or a home equity loan. You may want to finance a home renovation or pay tuition fees or even consolidate debt. Whatever the case, these loans are great financing options. HELOC and home equity loans allow borrowers to request for funds against home equity. 

Home equity and HELOC loans have the same method of borrowing money by using your home as collateral. However, a HELOC has varying interest rates, while a home equity payment is made in fixed installments. You can use a HELOC calculator to determine the monthly payment you need to make for your loan. So, what’s the difference between a HELOC and home equity loan?

Home Equity Line of Credit

A Home Equity Line Of Credit is a second mortgage. It is a circulating credit line that allows you to borrow a certain amount of money against the credit line up to a predetermined limit, pay back, and borrow again. Generally, the credit line is connected to the level of your home equity. With a home equity loan, a borrower receives all their funds at once, while HELOC allows you to tap into the credit line as need be. Your line of credit will stay open until its term is over. 

The amount of money borrowed on the line of credit can vary with time. Your minimum payments will also vary based on how much you use the credit line. The interest rates paid can increase or decrease at preset times. Besides, some HELOCs offer low introductory rates in the beginning (usually the first six months), after which the rates change to higher yet still varying rates. 

Generally, HELOC loans come in two repayment parts:

  • A draw period- with varying rate payments
  • A repayment period- with mostly fixed-rate amortized payments.

How to Calculate Your HELOC Payment?

The first step of calculating your HELOC payment is determining your current HELOC balance. Multiply the balance by the loan’s annual interest rate, and then divide the value by twelve to get your monthly payments. Alternatively, you use HELOC payment calculator. The tool will help you determine the interest rate adjustments throughout the loan term and get the monthly payments you need to repay the loan. You can also use the HELOC calculator to determine the amount of money you can borrow through HELOC. It also gives your Loan to Value Ratio, one of the crucial factors lenders consider when determining the amount of money, you can borrow against your home. 

What is a Home Equity Loan?

Home equity is a secured second mortgage that allows borrowers to use their homes as collateral to borrow a set amount. Using your home as collateral means providing security to protect your creditors should you fail to pay your loan. What you choose to do with your home equity loan is up to you. 

Once your loan is approved, you will receive the whole amount upfront. This type of home loan term. 

How to Calculate Your Home Equity?

You can calculate your home equity first by getting the approximate value of your home. You can do this by using an estimation value tool, checking out a recent appraisal, or comparing your home to other similar homes in your area. You can then combine all your outstanding mortgage balances, home equity loans, and HELOCs. Finally, subtract these balances from your estimated home value to get your home equity. 

You now have your answer to “What’s the difference between a HELOC and home equity loan?” Home equity loans will give your whole loan amount at once, after which you will start paying in fixed installments. Working with a fixed payment plan reduces impulse spending and makes budgeting easier. 

On the other hand, a HELOC is a credit line that taps your home equity for a particular time. You can borrow as much as possible during the draw period until you reach the limit. The draw period usually lasts ten years. You will still need to make payments (mostly the interest) throughout the draw period. After the draw period comes the repayment period, where you will need to repay the principal amount and the interest over the remaining loan term.