HELOC vs. Home Equity Loan

Each time you pay your monthly mortgage bill, you build equity in your home. You also build equity as the value of your home increases. Home equity is the value of your property minus what you owe on your mortgage. The good news is that equity can be useful in accomplishing your goals.

When it comes to tapping into home equity, two popular options that allow homeowners to borrow money against their property’s value are: a home equity line of credit (HELOC) and a home equity loan. While both options offer access to the equity you have built in your home, the ways in which these loans work—and the circumstances where they may be preferable—can differ significantly.

Let’s break down the differences and explore the benefits of each to help you make an informed decision.

What Is a HELOC?

A home equity line of credit (HELOC) functions similar to a credit card. HELOCs allow you to borrow, repay, and borrow again up to an approved limit. This flexibility makes a HELOC a great choice for ongoing expenses, such as funding home improvements, consolidating higher-interest debt, or covering education costs.

HELOCs typically have a variable interest rate, meaning the rate and your monthly payment can fluctuate over time. If your rate does change, it will be a result of a change in the prime rate, which is set by the Federal Reserve. HELOCs also begin with what is commonly called a draw period where you can access your funds and pay only interest on what you borrowed. Then comes a repayment period, where you can no longer access your line and you begin to pay back both principal and interest.

What Is a Home Equity Loan?

A home equity loan is a lump-sum loan typically offered with a fixed interest rate and fixed monthly payment. The loan amount is based on your home’s equity, which again is the value of your property minus what you owe on your mortgage. Home equity loans are an ideal option for homeowners who need a set amount of money for a one-time expense, such as a home renovation project, a large purchase such as a car or a wedding, or consolidating debt.

With a fixed interest rate, your monthly payments stay the same throughout the life of the loan, providing stability and making it easier to budget.

What Are the Benefits of HELOCs and Home Equity Loans?

Choosing the right home equity financing option depends on your individual needs and financial situation.

HELOCs typically allow for lower interest rates and more payment flexibility, making them a good choice if you need access to funds over time. A home equity loan may be a better fit if you need a lump sum of money all at once, or prefer the stability that comes with a fixed rate and fixed monthly payments.

If repaying the amount you borrow over a specific timeframe is an important goal to you, either a HELOC or a home equity loan can work for you. With a home equity loan, you can choose your repayment term at the start of the loan so you’ll know when your balance will be repaid in full. With a HELOC, you use a fixed rate lock option to designate a repayment term for all or a portion of your balance.

Both home equity loans and HELOCs allow you to access your home’s equity without having to touch your existing mortgage loan and you can use those funds for almost anything. They both may also offer tax deductions on the interest paid. Tax rules can be complex, so it’s always a good idea to check current IRS guidelines or to consult a tax professional.

Here are the key similarities and differences:

See infographic transcript below

How to Apply

Accessing your home’s equity can be a smart way to fund major projects or cover unexpected expenses. Whether you choose the stability of fixed payments of a home equity loan or the flexibility of a HELOC, understanding your options and the details of repayment will be key.

Working with a trusted lender like Fifth Third can guide you in making the right choice for your financial goals. Start the process right now:

• The Fifth Third Equity Flexline^® is a HELOC option that lets you access money as you need it—now and in the future. There are no closing costs and you will have the ability to draw money at any time. Apply here.
• A Home Equity Loan from Fifth Third allows you to receive funds in one lump sum at closing and secure a fixed rate. Apply here.
• You can also call us at 866-671-5353 or visit your local branch to discuss your options. Find a branch here.