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Home Equity Loan vs. Home Equity Line of Credit: How Are They Different?

Home equity loans and home equity lines of credit are both similar financial tools used by homeowners who need a quick source of funding. If you’re considering borrowing against your home, you want to understand the differences between a home equity loan vs. home equity line of credit. 

A home equity loan and a home equity line of credit both allow you to tap into your equity. But they differ in how you borrow and how your interest rate works. This guide will help you understand the home equity loan vs. home equity line of credit basics so you can decide which is right for you.

Home Equity Loans

A home equity loan is a secured loan that allows you to borrow against your home equity. These loans offer a fixed interest rate and repayment term. The interest rate you’re approved for depends on your personal financial history — which includes factors such as your credit score, payment history, loan amount, and income. 

If your credit improves after obtaining the loan, you might be able to refinance for a lower interest rate. Keep in mind, you’ll need a good amount of home equity to qualify — usually 15% to 20% or more. You’ll pay these funds back on a fixed schedule over the loan term. Your monthly payment will be based on the amount borrowed, term length, and interest rate.

If you take out a fixed-rate home equity loan, your payments are predictable over time. From the start of the loan, you know exactly what your interest rate and payments will be for the entire duration of the loan. These don’t change during the payback period.

How Does a Home Equity Line of Credit Work?

With a home equity line of credit, you’re approved for a line of credit up to a certain amount much like how a credit card works. You then repay the funds slowly over time. Typically, lenders will let you borrow from 80% to 90% of your home’s equity. At UCCU, we offer three different types of home equity lines of credit to suit your financial needs.

When you obtain a home equity line of credit, you are given a draw period or length of time during which your line of credit will stay open. Draw times typically average 10 years. After the draw period is over, you enter into the repayment period, which can be anywhere from 10 to 20 years.

Related: How Does a Home Equity Line of Credit Work?

Similarities: Home Equity Loan vs. Home Equity Line of Credit 

The similarities between the two loans are in how they are secured. Both loans use the equity you’ve built in your home as collateral. When it comes to which one you should choose, it’s important to consider your financial situation, and why you might need a loan. 

You can use the money as you see fit, though it’s generally recommended that you only borrow against home equity for value-adding home improvements or debt consolidation. You must remember with your home as the collateral any failure to make payments could lead to foreclosure.

Which One is Right for You?

Home equity loans and home equity lines of credit can both be great options, but in most situations, home equity lines of credit are the best overall. As you research, you’ll find home equity lines of credit offer the most competitive interest rates, the least amount of fees, and the best loan terms. 

A home equity line of credit gives you the ability to borrow as little or as much as you want — when you want. If you have upcoming expenses such as college tuition, a wedding, or family vacation, these loans give you the flexibility so you don’t have to borrow until you’re ready.

Put Your Home’s Equity To Good Use at UCCU

Many homeowners use a home equity line of credit to make repairs or remodels, consolidate higher-interest debt, finally take that family vacation, or simply enjoy the peace of mind that comes from knowing they have a line of credit ready for a rainy day. 

There are different home equity line of credit options available, each with its own terms and advantages. At UCCU, every home equity line of credit comes with no origination fees and no closing costs. When it’s your home equity line of credit, it’s up to you! 

Talk to a UCCU Home Equity Expert today or review different home equity line of credit options at the link below.

See Our Home Equity Options