Home Equity Loans and HELOCs: What's the Difference?

As a homeowner, it's great to see your monthly mortgage payments inch closer to the end of the amortization schedule. But you don't have to wait until you reach a zero balance to get excited.

That's because with each mortgage payment you make, you're building something that can be golden: Home equity. It's defined, in part, as the amount of your home that you actually own. Your ownership is built through monthly payments combined with the appreciation of the assessed value of the property. A quick way to calculate equity is to take the home's assessed value, multiply by 80 percent, then subtract any liens or loans against the property.

Credit unions like RBFCU offer two ways to leverage home equity into a loan to use for a number of purposes. These are home equity lines of credit (HELOC) and home equity loans.

There's a good chance you'll find a loan with a lower interest rate than what the credit card company is charging you.

A HELOC and a home equity loan sound the same, but there are differences. They look like this:

Home equity loan vs. HELOC: Which option is right for me?

How are the funds dispersed?


Home equity loan

You’ll have immediate access to a one-time amount — a lump sum. This works if you know the exact amount you need.

HELOC

This is an option if you don’t know exactly how much you’ll need right away. It leaves the door open to access more funds over a period of time.

How to use my equity?


Home equity loan

You can use it for debt consolidation, refinancing your existing home loan, tuition and small home improvements.

HELOC

Use it for emergencies, ongoing home improvement, pay off debt, pay some tuition rates and “flip” houses.

Terms


Home equity loan

Options include 4, 7, 10, 15, 20 and 30 years.

HELOC

They can be drawn against for 10 years, and repayment goes up to 15 years.

Fees and payments


Home equity loan

There are minimal closing costs for loans less than $125,000, no application fee and no prepayment penalties.

HELOC

There are minimal closing costs for loans less than $125,000, no application fee and no prepayment penalties.

Interest rates


Home equity loan

Rates are fixed for the term of the loan.

HELOC

Rates are variable and can change quarterly.

If you are thinking of tax benefits from these loans, be careful. The IRS has advised taxpayers that interest on a home equity loan, HELOC or second mortgage cannot be deducted in every case. Interest from these loans are typically deductible when the funds are applied to building an addition to an existing home. Interest on the same loan when used to pay personal living expenses, such as credit cards, is not. It is recommended to speak with a CPA or tax professional when tax laws are considered for home equity loans or HELOCs.

Total debts against the homestead, including HELOCs, are limited to 80 percent of the fair market value of the homestead. 30-year term only available for first liens. Borrower will be responsible for certain closing costs. If required, these closing costs may include title insurance, appraisal fee and survey costs. Hazard insurance is required. Home Equity Loans and HELOCs are subject to credit approval. Rates and terms are subject to change without notice. All RBFCU mortgage loans are available only on property in Texas. Home Equity loans and HELOCs are available on your primary residence only. As a safeguard, a 12-day cooling-off period is required by Texas law before Home Equity Loans or HELOCs may be closed. There is also a three-day right of rescission after closing before the funds may be disbursed. Minimum loan amount for a Home Equity Loan is $4,000. For HELOCs, a minimum $4,000 draw amount is required. HELOC Minimum Payment Requirements: Your minimum monthly payment will be calculated after each credit advance, and will be $14.00 per $1,000.00 of the outstanding balance after each advance rounded up to the nearest $1,000.00. Your payment amount will remain the same unless you obtain another credit advance. We will recalculate your payment each time you obtain an advance. Ex: a HELOC with $50,000 balance will require a $700 payment at the time of the draw ($50,000 balance ÷ 1,000 = 50 x $14 = $700). NMLS #583215.

This information is intended to provide general information and should not be considered legal or tax advice. Please consult a tax professional for more information.