A HELOC (Home Equity Line of Credit) and a HELOAN (Home Equity Loan) are two types of financing options that allow homeowners to borrow against the equity in their home. Both are useful for funding home improvements, consolidating debt, or covering other expenses, but they have different structures and characteristics:
1. HELOC (Home Equity Line of Credit):
- A HELOC is a revolving line of credit, similar to a credit card.
- It provides you with access to a set amount of credit that you can draw from as needed, up to a certain limit.
- The interest rate on a HELOC is usually variable, meaning it can fluctuate over time.
- HELOCs typically have two phases: a draw period (when you can borrow) and a repayment period (when you pay back the borrowed amount).
- During the draw period, you can borrow, pay back, and re-borrow multiple times.
- The repayment period usually follows the draw period, and at that point, you need to start repaying the principal and interest.
2. HELOAN (Home Equity Loan):
- A HELOAN is a type of installment loan.
- You receive a lump sum upfront and then repay it over a set term with fixed monthly payments.
- The interest rate on a HELOAN is usually fixed, meaning it remains the same over the life of the loan.
- Since the rate is fixed, you have predictable monthly payments.
Key Differences:
- Structure: HELOCs are revolving lines of credit, while HELOANs are installment loans.
- Interest Rates: HELOCs usually have variable rates, while HELOANs usually have fixed rates.
- Access to Funds: With a HELOC, you can draw funds as needed during the draw period, whereas with a HELOAN, you receive a lump sum.
Choosing between a HELOC and a HELOAN depends on your needs and financial situation. A HELOC might be better if you want ongoing access to funds or expect your needs to vary over time, while a HELOAN might be more suitable if you need a specific amount and want predictable payments.
From Investopedia... "Home Equity Loan vs HELOC: What's the Difference? Know your options before using your home as collateral to get cash".
