Home equity loans vs. HELOCs: pros, cons and considerations

Ginger Dean

July 5, 2013

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

Life is unpredictable. You can plan all you want, but somehow, situations crop up that interrupt those plans. This happens particularly with money and finance. No matter how much you save or budget, certain unforeseen circumstances show up.

For example, you need to do a quick home repair or settle a considerable monetary problem. When this happens, you need cash to take care of it -- and fast. This is where Home Equity Loans (HEL) and Home Equity Line of Credit (HELOC) come in. Most people confuse the two and mistake one for the other.

Home equity loans

Home equity loans (HELs) -- also referred to as close-ended loans -- are loans that the bank gives you after your mortgage. Unlike the latter, these loans are meant for you to do whatever you want with them.

Usually issued in one huge sum, HELs typically come with a fixed interest rate and offer a fixed monthly payment plan that's easy and straightforward. The bank will usually give you about 5-15 years to pay it all off.

If you can pay it off before, that's good, too. It's also good for curtailing impulsive spending. The downside is if you need more cash, you can't go back to borrow from the bank.

Home equity line of credit (HELOC)

Unlike the HELs, the bank will not give you the lump sum cash. Instead, you'll be given a checkbook and a credit/debit card that you can use to withdraw the funds you need or make any purchases you want. HELOCs are good for extended or huge projects that can involve unforeseen expenses.

To continue using this, you will need to continue paying off the principal every month. Every time you do that, it frees up more money for you to borrow or use. HELOCs are great because unlike HELs, they offer more flexibility and easy access to more funds. Unfortunately, they come with variable interest rates and are bad for the impulsive buyer.

Now that you know the difference, make the right choice by discussing your needs first with a home loan advisor or expert.

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