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HELOC or Home Equity Loan: What’s the Difference?

November 19, 2021
Happy couple working on their home.

Have you been putting off home improvement projects or other large purchases? If you’re waiting for the right circumstances to use your home equity loan or line of credit, now is a great time to move forward.

Using Home Equity to Your Advantage

A home equity loan or line of credit taps into the buying power of your home. You can use it to pay for home improvements, college tuition, debt consolidation, and medical expenses. Your home equity provides a low-cost option for borrowing money at interest rates that are tough to beat.

A home equity line of credit (HELOC) and a home equity loan are similar, but not the same. Understanding the differences can help you borrow wisely.

A home equity loan works well if you have a specific amount and/or project in mind. With a loan, you get the money you need upfront and then pay it back at a fixed rate and fixed monthly payment over a fixed term. The monthly payment and interest remain the same for the life of the loan.

A home equity line of credit is a form of revolving credit. With a HELOC, you have a credit limit that you can borrow against during the draw period. After the draw period ends, there’s a repayment period when you repay the outstanding balance of the loan. A HELOC has a variable interest rate that fluctuates over the life of the loan.

Borrow Smart with a HELOC

HELOCs can be used to your advantage in a number of ways:

  • Use it to consolidate debt or for a home renovation. A HELOC can be a useful tool for financing big purchases like home renovations. You can also use it to consolidate higher-interest-rate debt.
  • Create a safety net. A HELOC can also serve as a safety net for emergencies.
  • Take advantage of low interest rates. Credit union HELOC rates are often lower than rates at banks, which helps keep your monthly payments low. Credit unions focus on bringing the best value to members through competitive rates and low fees.
  • Reduce your tax bill. If you utilize your HELOC to buy, build or substantially improve your home, then your interest on the loan may be tax-deductible. Consult a tax advisor for further information regarding the deductibility of interest and charges.
  • Borrow again as you repay. A home equity line of credit can be paid down and then borrowed from again during the draw period, so there's no need to apply for a new loan as additional expenses come up. Interest only accrues on the amount you borrow, but oftentimes financial institutions will charge fees on HELOCs, most often an annual fee. Always review and evaluate the terms and conditions of the loan before entering into a contract, to ensure you know what your financial institution is charging you.

See What’s Possible

Find out what you can accomplish when you tap into the power of your home equity. Whether you plan to pay for projects now or finance other large expenses down the road, we’re here to help make it happen. Learn more about using your DCU home equity loan or HELOC to reach your goals.

This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.

Rates are effective November 12, 2021.

*APY=Annual Percentage Yield. Requires a $5.00 minimum balance to open the account and remain on deposit to maintain membership status. Rates are variable and may change after the account is opened and are subject to change weekly. Fees may reduce earnings on the account. One Primary Savings account per person, additional memberships receive one savings account. Other conditions may apply. Please refer to DCU's Account Agreement for Consumers, and Schedule of Fees and Service Charges, for important information and disclosures.