Expert explains differences between home equity loans and a HELOC

House values are on the rise, which means home equity is too.
Published: May. 2, 2022 at 9:14 AM EDT
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InvestigateTV - House values are on the rise, which means home equity is too. If you’re planning a home improvement project, that equity could help with the bill.

Now is a great time if you’re looking at pulling equity from your house to refinance and there’s two ways that you can do that: a home equity loan or a HELOC.

A home equity loan is a set amount of money, usually for a set amount of time with a set amount of interest.

“So if you’re a person who really likes to plan and know exactly what your payments are going to be and what your interest rate is going to be, a home equity might be more for you,” said Cherry Dale, a financial coach with the Virginia Credit Union.

Dale said the repayment term is usually a fixed period, typically from five to 20 years. The interest rate on this type of loan is also much lower than you would get from a credit card because your home is the collateral. If you default, your house is in jeopardy.

She said a HELOC, or a home equity line of credit, has a variable interest rate.

“…But the interest being variable means it could go up and down, based upon what is happening in the market. Now right now, the interest rates are quite low,” Dale noted.

However, the interest you owe could increase in a few years depending on what the market does and there’s one more thing to know. Usually, you’re locked into a time frame for a HELOC. At the end of that time, you owe whatever is left, so it can look like a balloon payment in the end.