Written by: Dan Bardenhagen

HELOC vs HELOAN: Which One’s Right for You?

When it comes to tapping into your home’s equity, two popular options are a Home Equity Line of Credit (HELOC) and a Home Equity Loan (HELOAN). Both have their pros and cons, so understanding the key differences can help you choose the right option based on your needs.

HELOC: Flexibility at Its Best

A HELOC functions like a credit card, allowing you to borrow up to a certain limit, pay it down, and borrow again as needed. This makes it ideal for ongoing projects or expenses that might fluctuate over time. For example, if you’re doing home renovations and aren’t sure how much you’ll need, a HELOC offers flexibility.

Pros:

    •  Flexibility: Borrow what you need, when you need it.

    •  Lower Initial Payments: With interest-only payment options in the early years, monthly payments can be lower.

    •  Variable Interest Rates: You could benefit from lower rates if market conditions are favorable.

Cons:

    •  Variable Rates: While low initially, rates can increase, making payments unpredictable.

    •  Temptation to Overspend: The ability to borrow repeatedly might encourage overuse of the line of credit.

    •  Short-Term Loans: HELOCs are typically structured with a draw period followed by a repayment period, which can be confusing for some borrowers.

HELOAN: Stability with a Lump Sum

A HELOAN is a lump sum loan with a fixed interest rate, which means you’ll know exactly how much you’re borrowing and what your payments will be for the duration of the loan. If you have a specific purpose, like paying off high-interest debt or funding a major home improvement, this predictability can be reassuring.

Pros:

    •  Fixed Rates: Payments stay the same throughout the loan term, making budgeting easier.

    •  Predictability: You know the exact amount you’re borrowing and for how long.

    •  Lump Sum Loan: If you have a one-time expense, this is a more straightforward option.

Cons:

    •  Less Flexibility: Once you take out the loan, you can’t borrow more without going through the process of applying for a new loan.

    •  Higher Payments: Since you’re repaying the principal and interest from the start, monthly payments can be higher than a HELOC’s.

Which One to Choose?

If you need flexibility and anticipate needing access to funds over time, a HELOC might be the better choice. But if you have a specific project or expense with a clear timeline, a HELOAN’s fixed rate and predictable payments could be the right fit.

Ultimately, the decision comes down to how much you need, how long you’ll need it, and how comfortable you are with variable payments.