The Differences Between Home Equity Products

Home Ownership

The longer you live in your home, the more equity you build. 

Home equity is defined as the portion of your home that you own. In other words, your equity represents your home’s market value minus any outstanding balance on your mortgage loan.

As you pay down the balance on your home loan, your equity increases. When you’ve established enough equity, you may be able to borrow from it in the form of a Home Equity Loan or a Home Equity Line of Credit (HELOC).

This article will define these popular home equity loan types, explain their differences, and discuss the ways homeowners can put them to good use.

What is a Home Equity Loan?

A Home Equity Loan is a loan product that allows you to borrow a fixed amount of money, which is provided to you in a lump sum. Your home serves as collateral to secure the loan.

A Home Equity Loan generally features a fixed rate, which means the interest rate won’t change over the life of the loan. Home Equity Loan rates are often lower than other consumer loan options. Your specific rate and the loan amount you’d qualify for are based on your credit score, financial standing, and the Loan-to-Value ratio of your home loan.

What is a Home Equity Line of Credit?

A Home Equity Line of Credit (HELOC) is a product that allows you to borrow money from your equity over a period as you need it, using your home as collateral. It enables you to borrow as much as you want, up to your credit limit.

Like a credit card, your HELOC credit “revolves,” meaning you could borrow $6,000 of your $10,000 limit, pay back $3,000, and then have $7,000 of remaining credit. Your credit limit and initial interest rate are based on your credit score, financial standing, and the Loan-to-Value ratio of your home loan.

What Are the Differences Between Home Equity Loans & HELOCs?

The differences between the two home equity loan types are in the interest rates and payments.

INTEREST RATES: Connexus’ Home Equity Loans have a fixed rate. A Home Equity Loan with a fixed rate will have the same payment amount every month. HELOCs have a variable interest rate. That means the rate may change throughout the repayment term. HELOC rates may change every April and October.

PAYMENTS: Connexus’ Home Equity Loan payments are fixed and consist of principal and interest. If you wanted to pay off your Home Equity Loan early, you have the option to pay more than the required minimum each month.

HELOC payments are different. Since the rate is variable, the monthly payment is subject to change. With a HELOC, in addition to paying principal, you only pay interest on the balance you owe. There is also an interest-only option with HELOCs. Find out when an Interest-Only HELOC is your best option.

What Are Home Equity Products Commonly Used For?

The great thing about home equity loans is that they’re so versatile. They can be used for nearly anything. Here are three of the most common reasons Connexus members take Home Equity Loans and Lines of Credit:

  • Debt consolidation: Some homeowners use a home equity product to consolidate more expensive debt into a single, streamlined loan with one monthly payment and a potentially lower interest rate.
  • Home improvement projects: The most popular way our members use a Home Equity Loan or HELOC is to cover the cost of large home improvement projects or significant remodels.
  • Other large purchases or expenses: Sometimes, life throws an expensive curveball. Some borrowers dip into their home’s equity to cover a significant emergency expense.

Which Home Equity Loan Type is Right for Me?

Choosing between a Home Equity Loan and a HELOC depends on a borrower’s needs and preferences.

If you want to know your exact monthly payment amount and the precise date when your loan will be paid back, then a Home Equity Loan is better. If you aren’t sure exactly how much funding you’ll need, or if you prefer a more flexible borrowing option, a HELOC could be the better choice.

You will also want to consider interest rates when deciding between a HELOC and a Home Equity Loan. Home Equity Loan rates are usually fixed. HELOCs, on the other hand, feature rates (and therefore payments) that might change.

Choosing between a Home Equity Loan and a HELOC depends on your financing needs, your monthly budget, and what you plan to do with the funds. The Connexus experts can help you make the right choice. We will review your needs and financial situation, answer your equity questions, and recommend the best option for you. Schedule an informational phone call today. Then, when you’re ready to apply, get started using our easy online application.