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HELOC vs. Home Equity Loan: Pros and Cons
Home equity loans and lines of credit extract value from your home. The loan is a lump sum, and the HELOC is used as needed.
Holden Lewis Senior Writer/Spokesperson | Mortgages, homebuying
Holden Lewis is a mortgage reporter and spokesperson who joined NerdWallet in 2017. He previously wrote for Bankrate, where he wrote about mortgages and real estate during the housing boom and bust. He has written articles about mortgages since 2001, and enjoys explaining complex topics to regular people who don't buy houses every day. Holden has been president of the National Association of Real Estate Editors and has won numerous writing awards. He splits his time between Jupiter, Florida, and Fort Worth, where he is renovating the house where he spent his high school years so he can move back and be a Texan again.
Amanda Derengowski Lead Assigning Editor | International personal finance, mortgages, small business
Amanda is a longtime personal finance editor. She leads the international expansion content team at NerdWallet, providing guidance to audiences in the U.K., Canada and Australia. Previously, she helped lead the mortgages and small-business teams. Before her time at NerdWallet, Amanda spent 10 years as a content and communications manager in the mortgages and real estate industry. Before that, she was a copy editor for the Contra Costa Times. She has a master’s degree in journalism and is a Dow Jones News Fund alum.
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Selling your home for a profit can mean a substantial windfall. Meantime, while you're living there, that gain is locked up, out of reach — unless you access the equity with a home equity loan or a home equity line of credit, known as a HELOC.
These two types of second mortgages are drawn on your home's equity: the home's market value, minus the amount you owe. Weighing the pros and cons of each will help you decide which one is right for you.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
To find out how much equity you’ve built up in your home, subtract the amount of money you owe on your mortgage from your property’s value. Depending on your financial track record, lenders may let you borrow up to 85% of your home equity. Keep in mind, though, that you’re using your home for collateral, so the lender can foreclose on your property if you default on your payments.
“Lenders may let you borrow up to 85% of your equity.”
The amount you owe on outstanding home loans divided by the market value of your home is considered the combined loan-to-value ratio. If that ratio is high, lenders will hesitate to let you borrow more against the home’s value.
An example: Your home is worth $300,000, and you owe $150,000. If you divide 150,000 by 300,000 you get 0.50, which means you have a 50% loan-to-value ratio. A lender that allows a combined loan-to-value ratio of 80% would grant you a 30% home equity loan or line of credit, for $90,000.
Home equity loans typically have a fixed interest rate, meaning the payment is the same each month; that makes them easier to factor into your budget. But remember: That home equity loan payment will be in addition to your usual mortgage payment.
Since it’s a lump-sum equity draw, a home equity loan is a good source of money for major projects and one-time expenses.
Home equity loans pros and cons
Pro: A fixed interest rate.
Pro: Monthly payments won't change and are for a set period.
Con: Tapping all the equity in your home in one fell swoop can work against you if property values in your area decline.
NerdWallet’s Best-Of Award Winner
Best Mortgage Lender For Home Equity Line of Credit
NerdWallet's ratings are determined by our editorial team. The scoring formulas take into account multiple data points for each financial product and service.
Bethpage offers a home equity line of credit with a high borrowing limit, no annual fee and a fixed-rate option. It’s easy to see HELOC qualifications, too.
HELOCs and home equity loans are similar in that you’re borrowing against your home equity. But a loan typically gives you a sum of money all at once, while a HELOC is similar to a credit card: You have a certain amount of money available to borrow and pay back, but you can take what you need as you need it. You’ll pay interest only on the amount you draw.
HELOCs often begin with a lower interest rate than home equity loans but the rate is adjustable, or variable, which means it rises or falls according to the movements of a benchmark. That means your monthly payment can rise or fall, too.
Many lenders will let you carve out a portion of what you owe on your HELOC and convert it to a fixed rate. You’ll still have the balance of your line of credit to draw from at a variable rate.
Pro: Pay interest compounded only on the amount you draw, not the total equity available in your credit line.
Pro: May offer the flexibility of interest-only payments during the draw period.
Con: Rising interest rates can increase your payment.
Con: Without discipline, you might overspend, tapping out the equity in your home and finding yourself saddled with large principal and interest payments during the repayment period.
Terms and characteristics of home equity loans and lines of credit vary from one lender to another. Be sure you understand the repayment terms of your loan before you commit to a lender, and don’t be afraid to shop around before you sign on the dotted line.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Before deciding whether to apply for a HELOC or a home equity loan, consider how much money you really need and how you plan to use it. Factor in interest rates, fees, monthly payments and tax advantages as you weigh your options.
Using the equity in your home before selling can be a powerful financial benefit. But remember, you're using your home as collateral. One risk to avoid, whether you choose a home equity line of credit or a loan: Resist funding short-term needs with what may eventually amount to a long-term loan.
NerdWallet's ratings are determined by our editorial team. The scoring formulas take into account multiple data points for each financial product and service.
Bethpage offers a home equity line of credit with a high borrowing limit, no annual fee and a fixed-rate option. It’s easy to see HELOC qualifications, too.
