HELOC vs. Home Equity Loan: What Smart South Florida Homeowners Choose (and Why)

4 MIN. READ

 

Key takeaways: 

• Home equity loans and HELOCs let you borrow against your home equity.
• HELOCs are the more flexible option, while home equity loans come with a one-time payout and a fixed interest rate.
• Power Financial Credit Union offers HELOCs, including a hybrid product with fixed interest for the first three to five years. 

Did you finance your home with a mortgage? If yes, your lender probably owns most of the house, while only a small portion is truly yours. This portion, known as home equity, grows when you make a mortgage payment.

The equity you have in your home is a financial tool you can use to get affordable financing for your projects. Whether you’re planning a renovation or need to finance your child’s education, you can tap into this equity by borrowing against it. 

Two popular ways to access your home equity are Home Equity Lines of Credit (HELOCs) and home equity loans. We’re here to discuss the differences between a HELOC vs. home equity loan to help you maximize your home equity.
 

HELOC vs. Home Equity Loan: Key Differences 

A home equity loan, sometimes called a second mortgage, allows you to take out a loan and use the equity in your home as collateral. 

You’re giving up a portion of what you own in your home against a lump sum of money. As you pay this loan back, you’ll regain equity in your home. 

Your home is solid collateral, so lenders view home equity loans as relatively safe and are willing to offer good fixed rates. Loan terms last anywhere from 5 to 30 years, and the amount you can borrow depends on: 
 

• The value of your home. 
• How much you own in the home (most lenders have a 70- 80% cap, meaning they won’t let you borrow more than 70-80% of the equity you own). 
• Your creditworthiness. 

Home Equity Lines of Credit or HELOCs are different from home equity loans. These products are revolving lines of credit rather than loans. You can think of it as a sort of credit card secured by your home.

Here’s how HELOCs work: 
 

• Once you’re approved for a HELOC, you enter a draw period that lasts 5 to 10 years. 
• During the draw period, you can take out money from your line of credit as needed. 
• You’ll then enter a repayment period, which lasts 10 to 30 years. You can’t take out any more money and must make payments toward what you borrowed.
• Your HELOC balance gathers variable interest over time. Different factors can influence your interest rate, including your credit worthiness and economic conditions.

What’s Best for You: Home Equity Loan Vs. HELOC? 

“A home equity loan is ideal for a major one-time expense,” explains Nathan O’Gorman, mortgage loan originator at PFCU. “It’s best for predictable costs. If you’re looking for flexibility or need to finance a project with ongoing spending, a HELOC makes a lot more sense for you.”

For instance, a home equity loan is suitable for a major renovation project with a clear budget. You could also take out a loan to cover a one-time emergency expense or consolidate high-interest debt. 

“We see PFCU members use HELOCs for a wide range of things, like supplementing their income in retirement, paying college tuition one semester at a time, or even financing smaller, ongoing improvements to their homes,” explains O’Gorman. 

HELOCs and home equity loans have different purposes, but the requirements are comparable: 
 

• Banks and credit unions will check that you have enough equity in your home for both. A 15 to 20% requirement is common. 
• You should also have a good credit score. 
• Your debt-to-income ratio matters, but HELOCs can accept a slightly higher DTI. 
• Both products typically come with origination and home appraisal fees. 

What to Consider Before Borrowing Against Your Home Equity 

Take these things into consideration when comparing HELOCs vs. home equity loans. 
 

Budgeting 

The timing of payments differs between HELOCs and home equity loans, and this affects your budget planning: 
 

• Payments are due right away with a home equity loan. Can you afford your mortgage payments and your home equity loan payments? 
• If you opt for a HELOC, you won’t have to make payments until five to 10 years from now. However, this could still be paying off your HELOC while living on a reduced retirement income. 

Risks 

You should also consider the risks involved. Both products use your home as collateral, meaning you risk foreclosure if you fall behind and cannot repay your home equity loan or HELOC.
 

Alternatives 

Before committing to either option, consider whether a cash-out refinance might be a good alternative. A cash-out refinance allows you to secure a lower interest rate on your current mortgage while getting a lump sum against a portion of your equity. This option might offer better terms or simplify your finances by consolidating everything into one payment.
 

Leverage Your Home Equity With Power Financial Credit Union 

Power Financial Credit Union has been serving South Florida communities since 1951. We know life can be unpredictable, which is why we offer flexible ways to tap into your home equity. 

Our traditional HELOC allows you to draw money for up to 10 years before repaying it at an affordable fixed rate. If you want more predictable costs, we also have a hybrid HELOC with a fixed rate for the first three to five years.

Learn more about our home equity products or contact us for personalized banking advice. 
 

FAQs 

Home equity loan vs. refinance: Which is best? 

A home equity loan is great if you want to keep your current mortgage rate low and don’t mind making a second payment. A cash-out refinance is a good option if you’re looking to consolidate payments. 
 

What’s the difference between a HELOC and a home equity loan? 

Both let you borrow against your home equity, but a HELOC allows you to take money out over the draw period as needed, while a home equity loan gives you a one-time lump sum.
 

Should I borrow against my home equity? 

Your home equity can be a great financing tool for securing low rates, but you need a repayment plan. It’s a popular option for financing renovations, consolidating debt, or even paying for emergencies.