HELOC comparisons

Comparing HELOCs to other types of loans can get complicated, because there are a lot of similar concepts and terminology for home equity products.

Each type of home equity borrowing can provide a solution, but picking the right type of loan is also about making sure you don’t overspend your budget.

When comparing HELOCs to other types of loans, be sure to check interest rates, closing costs, and repayment terms to make an informed decision.

Type of loan	Collateral	Type of Credit	Commonly Used for
HELOC	Home	Revolving	Large purchases Debt consolidation Home improvement projects
Home equity loan	Home	Installment	Large purchases Debt consolidation Home improvement projects
Cash out refi	Home	Installment	Refinancing a mortgage Large purchases Debt consolidation Home improvement projects
Credit cards	None	Revolving	Day-to-day purchases
Personal loans	Can be Unsecured or Secured (in assets like car, boat, house)	Installment	Large purchases Debt consolidation

 

What is a HELOC?

Home equity lines of credit (HELOCs) primarily differ from home equity loans in that they offer flexible borrowing amounts, variable interest rates, and separate withdrawal and repayment periods.

Like a credit card, a HELOC will allow you to borrow up to a certain amount, and your balance will incur interest as you make withdrawals. However, you can only access your HELOC funds during withdrawal period, when a HELOC may typically only require interest payments against your withdrawals.

When the repayment period begins, you will pay towards the principal of the amount you borrowed. This can make the monthly payments during the draw period and repayment period considerably different.

Add to that variable interest rates on HELOCs, which can make monthly payments fluctuate periodically based on national economic conditions.

How to calculate your home equity

To calculate your home's available equity, divide your current mortgage balance by your home's market value.

For example, if you currently owe $150,000 on your mortgage and your home's estimated market value is $300,000, you have 50% available equity in your home.

You can use a monthly payment calculator to calculate your equity and also find a rate and monthly payment for a home equity loan to meet your borrowing needs.

Pros and cons of HELOCs

The main advantages of a HELOC are its flexibility in payments and borrowing amount.

As opposed to borrowing a large lump sum that will need to be paid off the moment the loan closes, many HELOCs allow you to withdraw up to your borrowing limit during the withdrawal period and only pay interest on what you borrow (until the repayment period begins).

A key consideration with a HELOC is its variable interest rates and fluctuating monthly payments. Variable interest rates naturally move interest charges up and down periodically, based on factors of the national economy. The split between a HELOC’s withdrawal and repayment periods can mean that an affordable interest-only monthly payment during its draw period will increase to a higher monthly payment when the repayment period begins.

For undisciplined borrowers, a HELOC can be especially risky, because the consequences of not being able to pay back the loan could lead to losing your home.

Comparing HELOCs with similar borrowing options

As you consider a HELOC, be sure to compare it with similar borrowing options so you select a lending product that offers you the best rates and repayment terms to match your budget.

HELOC vs. Home equity loan

HELOCs and home equity loans both let you borrow against your home’s available equity.

Rates

HELOC rates may start off lower than home equity loan rates, but the HELOC rates can rise or fall according to movements of a benchmark due to their variable rates.

Home equity loans typically offer fixed rates that stay the same throughout the life of the loan.

Generally, HELOCs and home equity loan rates can be similar for comparable borrowers and borrowing amounts. The fixed rate that comes with a home equity loan may help to make monthly payments more predictable and could potentially save money on interest over the life of the loan when compared to a HELOC with a similar term.

Borrowing amounts

Whereas home equity loans offer fixed borrowing amounts available to you in a lump sum, your HELOC gives you revolving credit that you can borrow against up to a certain amount.

Because both HELOCs and home equity loans are secured by the available equity of your home, they both offer higher borrowing limits than most unsecured personal loans.

Repayment

Home equity loans require you to make regular payments after you take out the loan, and the monthly payments will be the same until the loan is paid off.

HELOCs allow you to make minimal payments during the draw period, sometimes amounting to how much interest you have accumulated from the amount you have withdrawn.

Following the draw period of your HELOC, you enter the repayment period, where monthly payments can be significantly more than the draw period’s interest-only monthly payments.

Available terms

Home equity loans typically come with between 10 and 30 year repayment terms so you can optimize your payment plan to match your budget. For example, if you borrowed $60,000 for a 20-year term at 8.99% APR, your fixed monthly payments would be $539.45.

HELOC terms are more complex, where a draw period can last up to 10 years and most repayment terms range from 5 to 20 years.

HELOC vs. cash out refinance

A HELOC and a cash out refinance can be used for similar purposes, but they are very different products. Most HELOC borrowers add a HELOC to an existing mortgage, leaving them with two monthly bills to pay.

A cash out refinance, however, allows you to borrow funds while earning a new loan for your existing mortgage or home loans—leaving you with one refinanced loan to pay back.

Rates

As a cash out refinance will typically be in first lien position (as the only loan against your home), it should feature a lower interest rate than borrowing through a HELOC.

Cash out refinances also include fixed rates, where most HELOCs offer variable rates. A cash-out refinance’s fixed rate enables more concrete financial planning.

Borrowing amounts

The money you receive through a cash out refinance will be equivalent to the amount you can borrow through a HELOC.

Both a HELOC and a cash out refinance put limits on borrowing based on elements of your financial status and according to your home’s combined-loan-to-value ratio (or available equity). Given these limits, both HELOCs and cash out refinances will typically offer higher borrowing limits than credit cards or personal loans.

Repayment

A HELOC will have its two separate repayment periods: the draw period (which may feature interest-only payments) and the repayment period.

A cash out refinance will simply have its one repayment term where you will make consistent monthly payments for the life of the loan.

Available terms

Cash out refinances often offers repayment periods of 10, 15, 20, and 30 years, allowing you to build a repayment plan that fits your schedule.

HELOCs usually include a withdrawal period up to 10 years and repayment periods that can flex from 5 to 20 years.

HELOC vs. personal loans

Compared to a HELOC, most unsecured personal loans will feature lower borrowing limits and higher interest rates.

Rates

Unsecured personal loan rates are fixed and usually have higher interest rates than HELOCs. The rates of a personal loan usually depend more on your credit score and financial status, as they are not secured by your home’s value.

Borrowing amounts

A personal loan usually does not offer as high of a borrowing limit as a HELOC.

Secured personal loans may offer a borrowing amount comparable to collateral used for the loan such as the value of a car or boat.

Repayment

Personal loans typically require regular minimum payments whereas HELOCs have draw and repayment periods.

Combined with HELOC variable rates, the monthly payments for a HELOC can vary dramatically.

Available terms

Personal loan terms typically are provided in months, often ranging from 36 to 84 months.

HELOCs have separate terms for the draw period (up to 10 years) and repayment period (5 to 20 years).

HELOC vs. credit cards

HELOCs are often compared to credit cards because both involve revolving balances.

The key difference between the two is that HELOCs use your home as security for your loan whereas credit cards do not have collateral.

Rates

Since credit cards are unsecured lines of credit, they pose more risk to the lender and tend to have much higher interest rates than HELOCs.

Borrowing amounts

HELOCs will often allow you to borrow much more than credit cards offer in credit limits.

While credit limits are often determined by your income, credit history, and credit score, HELOC borrowing limits are determined by how much equity you have in your home.

Repayment

Credit cards calculate interest based on their stated annual percentage rate (APR) to assess a daily charge to any existing balance. At the end of the billing cycle, your charges plus all interest charges will be used to calculate your minimum monthly payment.

HELOCs also have monthly payments that can fluctuate from month to month due to their variable interest rates. A HELOC often features a withdrawal period where you will owe only interest against your borrowed funds, which converts to payments towards the full principal when you enter the repayment period.

Available terms

A credit card does not include a specified term length, as your credit limit will stay active as long as your account is kept in good standing and is kept open by the issuer.

HELOCs include separate withdrawal periods up to 10 years and repayment periods up to 20 years.