What Is The Difference Between A Home Equity Line Of Credit (HELOC) & A Home Equity Loan (HELOAN)

What's the difference between a HELOC and a HELONE? If you're looking to borrow a little bit of money based on equity in your home, you might have come across two main options, home equity line of credit or HELOC and a home equity loan or a HELONE. The question is, what are the main differences between the two? And which one would be best for your situation? A home equity line of credit is a form of revolving credit. That means that it is an open account from which you can pull money when you need it and pay it down when you can. A home equity loan is a set amount with a set term. You get a lump sum and you pay that sum over time. Let's compare the details of the two types of credit. Both the HELOC and the HELONE are secured by the equity in your home. So in a sense, both of these are like second mortgages. The difference is in the flexibility of the two options. The HELOC will allow you to draw the funds when you need it, but the HELONE gives you the full amount you were approved for upfront. Let's say you needed $100,000 for a home improvement project. With a HELOC, you would have an open account for $100,000. When you need to make a payment to a contractor, you could pull the exact amount of money that you need from the account. With the HELONE, the bank will give you all $100,000 upfront. The chief downside to the HELONE is that you are immediately paying interest on the full $100,000, even if you might not need it immediately. This means that the HELOC payment is variable because it will depend on how much you are currently borrowing. The HELONE is amortized, which means your HELONE has a consistent payment for every month during the entire length of the term. The HELOC is open-ended. You could draw down and pay off the loan repeatedly over time. The interest rate you pay for a HELOC and a HELONE is different. A HELOC has a floating interest rate. It will change depending on the prime rate set by the Fed. So it is very possible that your interest rate could rise over time, even for the money that you've borrowed in the past. Similarly, it could also drop over time. The rate usually only changes once a quarter, but how frequently it can change will depend on your loan terms. In contrast, the interest rate for a HELONE is fixed. The interest rate you are given when you take out the loan is locked for the entire life of the loan. For many HELOCs, you are only required to make an interest payment each month. So you could choose to not pay down any of the principal. That's great if you run into a particularly tight month, but it also means that you won't be making any progress paying down your debt. Of course, for HELONES, that isn't an option. Your payment will always include a principal paydown amount. When you draw money from a HELOC, there is sometimes a cash advance fee that is a percentage of the amount that you pull out. Not all HELOCs have them, but you will need to be aware if the one you are considering does. A cash advance fee could make frequent push and pull of money much more expensive than you thought it would be. HELONES might charge upfront origination fees. This is a percentage of the loan amount that comes out of the proceeds of the loan. Not all HELONES charge an origination fee, but you need to be aware that it isn't uncommon. I do need to point out that if a fee is unavoidable, it will be included in your APR. That means that when you are comparing options, the APR will represent the interest rate as well as the fees. However, for HELOCs, that might be a little bit more difficult to do upfront. If you have a cash advance fee and you repay the loan one month later, the APR is significantly higher than if you pay the balance over the course of a year. Let's look at the pros and cons of HELOC and HELONES. The pros of a HELOC is that you only pay interest on the money that you pulled out. You also have the ability to cover future emergencies because you have access to more money if you need it. And if you haven't maxed out your line of credit, your interest rate could drop. And because a HELOC is secured against the equity in your home, it should have a lower interest rate and a higher line amount than you could get with an unsecured line of credit. The cons of a HELOC is that you have the temptation to overspend. And because the HELOC is secured by the equity in your home, defaulting on the loan could mean losing your home. Your interest rate could go up over time as well. If your HELOC has a cash advance fee, borrowing for short stints would be much more expensive than you expected. And finally, the HELOC payments are variable for three reasons. One, the payment will obviously depend on the amount you are currently borrowing. Two, the payment will depend on the current interest rate that could change. And three, the payment will change every month depending on how much you paid down the principal from the previous month. Now let's look at the pros and cons of a HELONE. HELONEs have predictable payments, which can make it easier to plan out your monthly finances. They also have fixed interest rates so you don't have to worry about your interest rate jumping on you. And because the HELONE is secured with the equity of your home, you can usually get lower interest rates and higher loan amounts than you could with a traditional installment loan. On the con side, you could lose your home if you default on the loan. Also, the structure of the loan means that you must borrow everything upfront that you're going to need. That means that you are paying interest for it from the very beginning. And the interest won't go down even if the interest rates fall, unless you refinance the loan. So there you have it. That's the difference between a HELOC and a HELONE. For more personal finance insights, please consider visiting us at the UConn Project and subscribe to our channel. Your support helps us be able to continue making content like this. Thanks for watching.