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 loan that allows you to borrow money with your home as the collateral. Unlike a mortgage loan, which gives you a certain amount of money all at once, a HELOC is a loan set up as a revolving line of credit and has a maximum “draw,” meaning you can take money from your HELOC, as little or as much as you like (up to the maximum), at any time during the HELOC’s “draw” period. Your maximum draw will be determined by your current equity in your house and your credit history. HELOCs make it simple to pay for emergency expenses, smaller home improvement projects and bills that need to be paid quickly. 

Pros:

  • No matter what your maximum draw number, you take only what you need, when you need 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 on credit cards or other unsecured loans.
  • The interest payments are usually tax deductible.

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 for 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 your 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.
  • The interest payments are usually tax deductible.

Cons:

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