Comparing HELOC vs. home equity loan
This article is for educational purposes only. JPMorgan Chase Bank, N.A., currently offers home equity lines of credit (HELOCs) in select states and does not offer home equity loans in any state. Please talk with a Home Lending Advisor to see if HELOCs are available in your area. Any information described in this article may vary by lender.
Quick insights
- A home equity loan has fixed interest rates and a predictable repayment schedule, which could be ideal for those who prefer stability and structured payments.
- With a home equity line of credit (HELOC), you only pay interest on the amount you borrow, and you can access funds as needed, which may be a good option for people who need ongoing access to credit.
- The approval process for both options typically require sufficient home equity, a strong credit score and a stable income.
When deciding between a home equity loan and a home equity line of credit (HELOC), it's important to understand which option aligns with your financial goals and needs. Both can provide access to your home’s equity. Each loan option differs in terms of flexibility, repayment structure and how you use the funds.
What is a home equity loan?
A home equity loan taps into the equity you’ve built in your home. You get a lump sum of cash based mostly on the equity you’ve built up in your home. You can typically use the money however you’d use money in a checking or savings account, but the options vary by lender. You agree to repay the loan, plus interest, often at a fixed rate.
What is a home equity line of credit (HELOC)?
A HELOC is like having a credit line that’s secured by your home. A HELOC is a revolving line of credit that you can borrow from as needed during the draw period, which typically lasts 3-10 years. The limit on what you can borrow is based on the equity you have in your home, among other factors. The draw period and how you can access the credit line varies by lender. After the draw period, you enter repayment for what you borrowed, plus interest charged at a variable rate.
Key differences between a HELOC and home equity loan
Each loan option has its pros and cons depending on your financial needs and comfort with repayment flexibility. Here are some of the key differences between a HELOC and a home equity loan.
Payout
- HELOC: Revolving line of credit (borrow as needed)
- Home equity loan: Lump sum of money upfront
Repayment
- HELOC: Flexible payments (interest-only options available)
- Home equity loan: Fixed monthly payments
Interest rate
- HELOC: Variable interest rate (can change over time)
- Home equity loan: Fixed interest rate (remains constant)
Usage
- HELOC: Use funds as needed during the draw period, similar to a credit card
- Home equity loan: Helpful for large, one-time expenses
Flexibility
- HELOC: More flexible—borrow multiple times during the draw period
- Home equity loan: Less flexible, full amount received at once
Good for
- HELOC: Ongoing expenses like home improvements or emergencies
- Home equity loan: One-time expenses like debt consolidation or major renovations
Risk
- HELOC: Higher risk if rates increase, monthly payments may fluctuate
- Home equity loan: Predictable costs, potentially lower financial uncertainty
Interest payments
- HELOC: Pay interest on what you borrow from the revolving credit line, similar to a credit card. If you’re approved for a $50,000 HELOC but only use $10,000, you will only pay interest on the $10,000, not the entire $50,000.
- Home equity loan: Pay interest on the entire loan amount. If you take out a $50,000 loan, you’ll pay interest on the entire $50,000, even if you don’t spend it all right away.
Similarities between HELOCs and home equity loans
Home equity loans and HELOCs have several things in common, including how they’re used and how homeowners could qualify.
Use cases
In their own ways, HELOCs and home equity loans can provide homeowners with a source of money. This can be used in various ways, from meeting financial goals to covering unexpected expenses. Here are some examples:
- Home improvements: Build a kitchen island, remodel your bathroom for added comfort and home value.
- Debt consolidation: Pay off high-interest credit card balances or personal loans into a single form of credit—streamlines payments and may reduce interest costs.
- Education expenses: Cover tuition fees for college or pay for professional certification courses to advance your career.
- Emergency expenses: Handle unexpected bills without dipping into your savings.
- Major life events: Finance a wedding or help with a child’s down payment on their first home.
- Retirement planning: Supplement your retirement income by using equity to cover living expenses or long-term care.
Qualifications and requirements
The exact requirements for obtaining a HELOC or home equity loan can vary by lender, but here are some common criteria:
- Sufficient home equity: Lenders typically require you to have at least 20% equity in your home, which is its current market value minus the outstanding loan. Most lenders allow you to borrow up to 80% of your home’s current market value.
- Good credit score: Your lender will also review your credit score as part of the application. The exact minimum will vary by lender and the holistic review of your application.
- Stable income and employment: Lenders will review your income, employment history and debt-to-income (DTI) ratio to ensure you can manage additional debt.
- Low DTI ratio: Most lenders prefer a DTI ratio below 43%, meaning your monthly debt payments (including the HELOC) should not exceed 43% of your gross monthly income.
- Property appraisal: Your lender may require a professional appraisal to determine your home’s current market value before approving the HELOC. Some lenders may use an automatic valuation model (AVM).
- Strong payment history: A solid history of on-time mortgage payments and responsible credit use often increases your chances of approval.
Home equity loan vs. HELOC: Which is better?
Choosing between a home equity loan and a HELOC depends on your financial needs. A home equity loan can be an optimal option for large, one-time expenses with fixed payments and interest rates. A HELOC allows you to borrow as needed during the draw period, offering flexibility for ongoing expenses, but tends to have a variable interest rate.
In summary
When deciding between a home equity loan and a HELOC, your choice should serve your unique, current situation and long-term plans. A home equity loan provides a lump sum, and when payments are due, they’re fixed. Meanwhile, a HELOC offers some flexible, as-needed access to funds, but the interest rate and monthly payments may fluctuate during repayment.
To learn more about your options, consider consulting with a Home Lending Advisor to receive personalized guidance.
