For homeowners looking to take advantage of the equity they possess in their residence, a home equity line of credit (HELOC) and a home equity loan are both great options. By tapping into your home’s equity, you may be eligible for a loan with a, generally, lower interest rate and easier eligibility requirements. While both of these products are considered second mortgages, there are some key differences to consider when deciding which one is right for you.

What is a Home Equity Loan?

A home equity loan is a lump sum closed end loan with a fixed interest rate, borrowed against your home’s equity. Once you are approved for a home equity loan, you receive the entire loan amount in one lump sum that is deposited into your account at closing. You then begin making fixed monthly payments over the loan term until the loan is paid off.

What is a HELOC?

A HELOC is a revolving credit line, similar to a personal line of credit, that allows homeowners to borrow money against the equity of their home as needed. Since it is backed by an asset (the borrower’s home), the HELOC is secured debt and will generally have a lower interest rate than unsecured debt, like a personal loan. Once you’ve been approved, you can borrow as much or as little as needed, during a period of time known as the “draw period”. The draw period generally lasts five to ten years. Once the draw period ends, the borrower has the choice to begin repaying the loan, or refinance to a new loan.

So, how do you decide which one is the right option for you? Here are some things to consider:

Flexibility: HELOCs are more flexible than home equity loans, as you can withdraw and repay multiple times during the draw period. This may be a good option if you need ongoing access to cash for a longer period of time.

Interest rates: HELOCs generally have variable interest rates, which means your payments may fluctuate over time. Home equity loans, on the other hand, have fixed interest rates, which means your payments will remain the same.

Costs: Both HELOCs and home equity loans may come with fees, such as appraisal fees, closing costs and annual fees. It’s important to compare these costs before deciding which option is right for you. For instance, a loan from Ascend offers competitive interest rates, low closing costs, flexible terms and no penalties for early repayment.

Both HELOCs and home equity loans can be the right choice for borrowers who need to access cash for things such as home improvements, debt consolidation, or to cover unexpected expenses. While these loans can be useful tools, borrowers should carefully consider their ability to repay the loan and make sure they understand the terms and conditions of the loan before borrowing. Click here for more information on the difference between HELOCs and home equity loans.

If you’re a homeowner in need of some extra cash, consider Ascend Federal Credit Union as your lender. Click here to apply online or schedule an appointment to meet with an Ascend loan specialist.