Best Reston Agent

TEXT ME NOW: 703-596-5065

Home Equity Loan vs. Line of Credit

Home Equity Loan vs. Line of Credit

Are you looking to tap into the equity in your home in Reston for home improvements or debt consolidation?  You can accomplish this through either a home equity loan or a home equity line of credit (HELOC). What is the difference and which one is right for you? Let’s dive in and explore the differences!

The Home Equity Loan

A home equity loan, also referred to as a second mortgage, is a loan based on the equity you have in your home.  With a good credit score, you can borrow 80-90% of your property’s appraised value. You will apply for an exact amount, which you will receive as a lump sum, and have a fixed interest rate and set payments.

The Home Equity Line of Credit

A HELOC is a revolving line of credit, like a credit card, borrowed against the equity in your home. With a HELOC, you are given a draw period during which you can borrow money as needed until the draw period is over. During the draw period, you will make interest only payment, then be responsible for principal and interest when the draw period ends. Interest rates are variable.  

Deciding between the two

There are some things to consider when determining whether a home equity loan or a HELOC is right for you.  If you know exactly how much money you need and specifically what you want to do with it, then a home equity loan might be your best bet. You can borrow exactly what you need and enjoy a set interest rate and payment schedule.

If you aren’t sure how much you’ll need to borrow or when you need it, the HELOC may be a better option. The HELOC will give you ongoing access to cash, for up to 10 years, and you can borrow, repay the money and borrow money again as often as you would like as long as you are in the HELOC draw period. This flexibility will come at the cost of a variable interest rate that could fluctuate in unforeseen ways.

A Third Option

If you have owned your home for a while and are looking to do some updates, a cash-out refi could be right for you.

With a cash-out refi, you’ll get a new mortgage on your existing property and borrow from the equity you’ve built. You will have a new, higher mortgage and you will get the difference in cash. Interest rates can be fixed or variable and there may be closing costs you have to pay. With a cash-out refi, you will still have just one mortgage payment.  You can use the money you take out for home improvements, debt consolidation, or any way you choose.

Interest rates have hit record lows in the past year, though they are beginning to creep up. Check online sources here and here, or contact your lender to find out what your options are for a loan, HELOC or cash-out refi.

Scroll to Top