What's the difference between a HELOC and a Home Equity Loan?

HELOC (Home Equity Line of Credit) is an adjustable-rate mortgage, tied to the prime rate, a borrower takes out on their home and uses as a line of credit. It works like a credit card, with the ability to borrow money (against the equity in their home) at different points in time and only pay interest on what they use.


A Home Equity Loan (HELOAN) is a fully amortized fixed rate mortgage providing the borrower a lump-sum as opposed to a line of credit. If the borrower were to take $150,000 out of the equity of their home, they would receive one payment of $150,000 and begin to pay interest on the full amount immediately. Similar to a fixed rate agency loan, but in a second lien position. 


HELOCs and Home Equity Loans offer borrowers considerably lower interest rates than those of credit cards, and give the ability to tap home equity, without impacting a low rate first mortgage. That’s why many people opt to use these mortgages to consolidate their debt or make big purchases with lower interest rates!


Which option is right for your borrowers?

Consider a HELOC:

- For those who want better cashflow with an I/O option.

- For those who need periodic access to cash/flexibility.

- For those who want to see large payments on the outstanding balance and see a corresponding payment reduction.


Consider a HELOAN: 

- For those who are concerned about fluctuating interest rates.

- For those on fixed income and need stable payments.

- For those who have an immediate need for cash.