Home Equity Loans Vs. Home Equity Lines of Credit

Learn the Difference Between a Home Equity Loan and HELOC

Your home’s equity can be a great asset for consolidating debt, home improvements, or anything else. Discover the difference between the two options to determine which is best for you.

Home ownership can be very rewarding and a good long-term investment. It can also be a source of equity that you can use for a variety of needs. With the cost of everyday living increasing, finding secure sources of funds can be a challenge. That is why more homeowners are tapping into their equity, but which product is right for you?

We will explore the differences between Home Equity Loans and Home Equity Lines of Credit (HELOC), break down the pros and cons, and show you how Jefferson Security Bank can help navigate the process to access your home’s equity.

For more than 155, Jefferson Security Bank has been building stronger communities that support our customers’ financial goals. We serve Jefferson and Berkeley counties in West Virginia with an additional drive thru location in Washington County, Maryland. Our expert Lending Team  is here to help you make the most of your home’s equity and lending solutions to manage your budget.

The Reality of Debt

The current financial landscape means that many people are carrying more debt than ever. Based on multiple studies, the average person has an estimated $21,000 in debt minus housing costs.

Type of Debt	Average Balance
Credit Cards	$6,500
Auto Loans	$24,000
Student Loans	$39,000
Medical Debt	$3,100

 

Rising costs, rising inflation, and stagnant wages mean more people are struggling to stay on top of their debt. This is why tapping into your home’s equity is not only a great way to get caught up, but also to create an emergency fund.

 

Start With the Basics

Before we get into the details, let’s take a look at the main differences between Home Equity Loans and a HELOC.

Home Equity Loan	HELOC
Single lump sum payment Fixed interest rates and monthly payments	Line of credit available for withdrawal as needed. Variable interest rates and fluctuating monthly payments

 

There are more details between the two options, but at the highest level, one gives you a lump sum and the other acts like a credit card. There is no right or wrong option; it is more about being very clear about how you will use the money and how repayments fit into your budget.

Home Equity Loans – Funds All At Once

Home Equity Loans are often referred to as a Second Mortgage. You use the equity in your home as collateral, which means the lender can foreclose on the property if you fail to make payments. What makes them appealing is you get your funds all at once. This is perfect if you are looking to consolidate debt or want to make home improvements.

Pros	Cons
Lump sum payment	Second mortgage payment
Faster application process	Higher upfront closing costs
Lower interest rates	Risk of foreclosure

 

HELOC – Access Funds as Needed

HELOC acts as a revolving line of credit determined by your home’s equity. They are structured around a Draw Period, which is typically 10 years, where you can withdrawal funds as needed. You then have a 10-20 year period to pay the principal amount and interest.

Pros	Cons
Repay only what is used	Variable interest rates
More flexibility	Potentially spending more than you need
Typically lower interests rate despite variable	Payments can be high during pay back period

 

Know Your Financial Picture

Before you decide which product might be best for you, you need to know your full financial picture. This will help you focus on how much money you want to borrow and how you want to use it.

Pull Your Credit Score

Most lenders require at least a 620 credit score to qualify for either product, while some prefer a credit score at least in the low 700s. You can pull your credit report for free annually at AnnualCreditReport.com, or subscribe to services such as Equifax and Experian.

If your credit score is less than perfect, don’t worry, there are steps you can take to improve your score, but it will take some work and time:

• Dispute any errors or incorrect information
• Keep all credit card utilization to around 30% - 40% of available credit
• Pay all bills on time
• Avoid debt consolidation programs as they can negatively impact your credit score
• Do not open any new credit cards

By improving your credit score, keeping healthy credit utilization, and understanding your total debt, you can help create good budgeting habits. This will be critical when you take on either a HELOC or HEL; you don’t want to fall behind or default on any payments.

Use Jefferson Security Bank’s Financial Tools

After you check your credit score, it’s a good idea to calculate the estimated equity in your home or monthly payment for a second mortgage. Jefferson Security Bank has to easy-to-use tools that can be helpful when considering how much you want to borrow and monthly payments.

• HELOC Calculator – estimate how much equity you may have available in your home
• Mortgage Calculator – determine your monthly payment based on how much you want to borrow