Home equity line of credit vs. home equity loan: Which is better?
Both HELOCs and home equity loans let you unlock the value of your home for major projects and purchases. But which is the best option for you? Use our guide to learn whether a HELOC or home equity loan is right for your unique situation.
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5 min. read
As a homeowner, you’re sitting on a valuable asset — your home. You can use the equity that you’ve built up in your home to finance renovations, consolidate debt, make major purchases and more. But there are only a handful of ways you can tap into that equity.
Two common ways to take advantage of your home’s value are a home equity line of credit (HELOC) and a home equity loan. They both let you borrow money against the value of your home, and usually come with lower interest rates than other loan types, since you’re using your home as collateral.
By understanding the differences between HELOCs and home equity loans and getting to know the advantages of each, you can make an informed decision about which lending option is right for you.
What’s the difference between a HELOC and a home equity loan?
There are some similarities between HELOCs and home equity loans – they both involve borrowing money based on the amount of equity you’ve built up in your home. But there are also a few key differences between these two lending options.
Let's explore the differences between HELOCs and home equity loans:
HELOC | Home equity loan | |
|---|---|---|
How it works | Borrow what you need, when you need it Borrow what you need up to an approved credit limit for 10 years (also known as the draw period). Pay interest only on what you use – or repay the balance to use again and again. After that, you’ll repay your outstanding balance over the next 20 years (known as the repayment period). | Get a one-time fixed amount You receive a one-time lump sum that you’ll pay back over a set period of time, plus interest. |
Interest rate | Get a variable interest rate (usually) The annual percentage rate (A P R) is a variable interest rate tied to the prime rate, plus an additional percentage based on factors like the location and condition of your home, the loan amount and your credit history. While your interest rate may adjust during the draw period, some lenders offer the option to lock in all or a portion of your line at a fixed rate. | Get a fixed interest rate The interest rate and term is fixed, meaning your payment will not change over the life of the loan. Much like with a HELOC, your interest rate is based on many factors, like the location and condition of your home, the loan amount and your credit history. |
Term | Get a draw period and a repayment period during your term Your term is divided into two parts. The first 10 years is called the draw period, during which you can take out and then repay funds to use again and again. After that, the repayment period starts and you’ll typically pay back your outstanding principal balance plus interest over the next 20 years. | Pick your loan term The term for a home equity loan is typically anywhere from five to 20 years. |
Repayment | Pay interest only during the draw period During the draw period, monthly payments cover your interest charges only. During the repayment period you’ll make monthly payments toward your principal and interest for the term of your loan. | Pay your principal and interest throughout your term You’ll make monthly payments toward your principal and interest for the term of the loan. |
Which one is better for you: A HELOC or a home equity loan?
Now that you understand how these two lending options differ, you’re ready to decide which one works best for you and your unique situation. Here’s some advice to help you choose between a HELOC and a home equity loan.
A HELOC might be right for you if:
You’re planning a project or several projects that will occur over an extended period of time. A HELOC is a great solution for ongoing projects, because it ensures you’ll only pay interest on the money you use. For example, if you’re gutting your kitchen this year and considering a bathroom revamp down the road, a revolving line of credit like a HELOC could be a perfect fit.
You want to consolidate your debt. A HELOC lets you simplify high-interest credit card or loan payments into one monthly payment. Learn more about consolidating debt with a HELOC.
You’re looking for a safety net or emergency fund that can help you cover unexpected expenses. A HELOC lets you borrow as much or as little as you want (up to your credit limit), whenever you need it. That flexibility makes it a smart option for a rainy-day fund.
If you’re looking to do a home renovation and need the flexibility, BMO offers a H E L O A N option that gives you more for your equity: with the Community Home Improvement Loan, you can borrow up to 100% of the value of your home. footnote 1 You can speak to one of our Branch Bankers to learn more.
A home equity loan might be right for you if:
You have a large one-time expense. Because a home equity loan gives you a one-time lump sum, it’s a smart option for funding major purchases or one-and-done projects. This includes a one-off home renovation, like remodeling your basement or adding an addition.
You like the security of a fixed monthly payment. Since home equity loans have a fixed interest rate and term from 5 to 20 years, you can feel secure that your monthly payment will always stay the same, no matter how interest rates may fluctuate.
You’re looking for a way to consolidate your debt. Like a HELOC, a home equity loan is an alternative to high-interest loans or doing a balance transfer. Find out if you can save money by consolidating your debt with a home equity loan.
How much can you borrow with a HELOC or home equity loan?
The amount you can borrow for a HELOC or home equity loan varies, but it’s tied closely to the value of your home. That’s because both of these lending options rely on the equity in your home as collateral. In most cases, you’ll be able to borrow about 80% of the full value of your home.
If you want to know exactly how much you’ll be able to borrow, you’ll just need to crunch a few numbers. Here’s an example to help you out:
Say your home is worth $300,000. Multiply that by 80% and then subtract what you still owe toward your mortgage. 80% of $300,000 is $240,000. Let’s say you currently owe $100,000 on your home. Subtracting the $100,000 that you still owe means that you have $140,000 to potentially borrow.
$300,000 multiplied by 80% = $240,000
$240,000 minus $100,000 owed = $140,000 available to borrow
You can also use our calculator to quickly and easily figure out how much you can borrow.
Both a HELOC and a home equity loan can help you unlock the value of your house for major renovation projects, debt consolidation, an emergency fund and more. The right option for you will depend on your unique circumstances, including what you plan to use the money for, how frequently you’ll want to access funds and how comfortable you are with a fluctuating interest rate.
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- footnote 1 Loan must be secured by an owner-occupied 1 to 4 family residence located in a low to moderate income census tract in select counties in Arizona, California, Colorado, Florida, Iowa, Idaho, Illinois, Indiana, Kansas, Minnesota, Missouri, North Dakota, Nebraska, New Mexico, Nevada, Oklahoma, Oregon, South Dakota, Utah, Washington, Wisconsin or Wyoming. The property must be in good condition and have a value sufficient to support the extension of credit. Loan amounts range from $5,000 to $15,000 and are subject to approval. This offer does not apply to any loan that will be used to purchase the subject property. This offer is non-transferable and cannot be combined with any other offer.