Home Equity Loan vs HELOC

There are times when you need to tap into your home’s equity, whether that be to pay for schooling, large renovations, or any other large purchase. There are two main ways of utilizing the collateral in your home: through an equity loan or a line of credit. While the two both pull from the same source, they each have a different approach to doing so. These differences are important to consider when choosing which route is best for you. In this week’s article, we are going to discuss how both of these mortgage products work and how they may work for you.

Home Equity Loan

A home equity loan is sometimes referred to as a second mortgage. This is because they are treated in much the same way as a regular mortgage. You are paid one lump sum and then are expected to pay back the principal and interest in fixed monthly payments for a fixed term. Keep in mind that closing costs for a home equity loan will be similar to that of a mortgage, so be sure to budget for loan-processing fees and the like. 

Home Equity Line of Credit

Home equity lines of credit, or HELOCs, are a revolving credit line in much the same way as a credit card. The borrower can take money out and repay it all up to a certain limit. HELOCs typically have two phases. The first phase is the draw period. During this time, you can withdraw funds while also being required to pay interest on the money you take out. The next phase is the repayment period. Once this begins, you must begin to pay back in larger amounts, this is because you are paying the principal and the interest. At this time, you will no longer be able to withdraw money. The interest rates are typically variable in this scenario. 

The Bottom Line

Home equity loans are great for homeowners who like to know exactly what to expect when it comes to finances. This is because they are predictable and have fixed rates. They can also be helpful for large one-time investments such as consolidating debt or remodelling. The overall cost of a HELOC can be more difficult to pin down since they are set at variable rates and you may borrow more or less than originally expected. That being said, if you need ongoing cash for a set period of time – let’s say you or a loved one are enrolled in post-secondary education and need to pay tuition semi-regularly – it can help meet those needs for the entire duration of the draw period. Accessing cash through your home’s equity can be a great way to meet your financial goals. The key is to invest in the product that is best for you. Our central Alberta-based team at Source Mortgage can help you determine if a home equity loan or HELOC is right for you. Contact us today to get started!