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Looking for some extra cash to renovate a bathroom or pay off a big, unexpected bill? Put your home to work for you and borrow against its value by using a Home Equity Line of Credit (HELOC) or getting a Home Equity Loan. 

Here’s how they both work, where they differ and a few pros and cons of each.

HELOC

A HELOC is a revolving line of credit that allows you to borrow money against your home as the collateral. Unlike refinancing your mortgage, a HELOC offers you the flexibility of a revolving line of credit. 

Pros:

  • No matter what your maximum draw amount, you take only what you need (when you need it), and only pay interest on what you draw.
  • HELOCs often have low upfront costs compared to other types of loans and usually no formal closing.
  • You usually get lower interest rates on HELOCs than credit cards or other unsecured loans.

Cons:

  • Since they are classified as Adjustable Rate Mortgages, when interest rates go up, the rates on HELOCs do too, and they go up a lot faster than they do on other loan types.
  • Depending on the terms, you may have a more limited amount of time to use the funds of a HELOC.
  • Since you’re using your home as collateral, the lender can foreclose on your property if you can’t make your payments.

Home Equity Loan

A Home Equity Loan is often referred to as a second mortgage and operates in much the same way that your primary mortgage does. You borrow a set amount of money, which the lender gives you in full, and then you pay it back (with interest) in equal monthly payments over a fixed period of time. The amount you can borrow is determined by the current equity in your house and your credit history. Home equity loans are especially useful for debt consolidation and large expenses like remodeling your house.

Pros:

  • Home equity loans often offer lower interest rates than credit cards or other unsecured loans.
  • Home equity loans are usually fixed rate loans, so you know exactly what you owe at the outset, and it will not change, making it easier to factor the costs into your financial plan.

Cons:

  • Home equity loans often require the borrower to pay additional fees - such as closing costs, title work, a home appraisal and other fees.
  • Since you’re using your home as collateral, the lender can foreclose on your property if you can’t make your payments.