You may hear the term home equity loan and HELOC used interchangeably, but they are different things. You’ll likely be more interested in one or the other depending on your situation and your financial goals.
It’s really important to compare the two carefully and understand exactly what you’re getting into. Tapping into your home’s equity can be a financially savvy move, but it can also be risky if you don’t take the time to understand what you’re doing and how it can affect your future finances.
Subtract what you still owe on your mortgage from the value of your home. This is the equity you have in your home, and it’s what can be used as the collateral for your new loan.
A HELOC, or home equity line of credit, is a lot like a credit card. Instead of borrowing a lump sum of money at one time, you are given a certain limit on the money you can borrow (this is often capped anywhere between 80 and 95% of the equity you have in your home).
For instance, you may be approved to borrow up to $50,000 of the equity you have in your home, but you don’t have to take that amount at once, or even necessarily take it all. You only borrow what you want to borrow and then pay interest on that amount only. You can draw money for as long as the draw period is, usually around 10 years.
At the beginning, HELOCs often have lower interest rates than home equity loans, but they also have an adjustable rate, meaning that your payments could rise or fall at any time. This can be difficult to budget for, especially if interest rates rise (which they have been doing lately).
Sometimes you can pay a fixed rate on a certain amount of money while paying a variable interest rate on the rest. And some HELOCs will allow you to pay only interest during the draw period, as well. But this means that you’ll pay more later since you’re not paying off any principal now.
A HELOC is great because you don’t pay interest on more money than you actually need. It allows you to tackle projects of all different lengths and costs, like buying a new refrigerator but then also remodeling a bathroom a year later. You only have to pay interest on the projects as you do them, so this is a good fit for expenses that come in stages.
It could also be a good fit for incremental expenses like college tuition.
It’s easy to overspend on a HELOC, especially if interest rate changes make your monthly payments higher than you’d anticipated.
A home equity loan pays you a lump sum of cash. This sum is usually capped at around 80% of the equity you currently have in your home.
Home equity loans often have a fixed interest rate, which means that just like your primary mortgage, you’ll pay the same amount each month. Of course, this means that the loan is easier to factor into your budget because you know exactly what the cost of borrowing the money is each month. The payments will also last for a set period—usually anywhere between 5 and 20 years.
A home equity loan is great if you want to do a major, one-time renovation on your home. It’s also a good idea if you’re looking to consolidate high-interest debt all at one time.
If property values take a drastic decline in your area, you may find yourself upside down on your home (meaning that you owe more than it’s worth) for money that you’ve already spent. This situation can make it very tough to sell your home.
Tapping into your home’s equity can be a fantastic way to accomplish some of your financial goals without selling your home, but it’s not a decision that should be taken lightly.
First, be aware that these second mortgages have closing costs and fees similar to those you paid with your primary mortgage.
Second, the risk when you use your home equity as collateral for your loans is that your home can be foreclosed on if you can’t make the payments. And, as I already mentioned, if the value of your home goes down, you could end up owing more to the bank than your home is worth.
To lessen the likelihood of these problems, some experts suggest only using your home’s equity if you’re going to use it to add value to your home. Other experts suggest using it only for major purchases that don’t depreciate quickly (in other words, using it for a car might not be the best choice).
As always, we encourage you to consult with a financial advisor if you have questions about your specific financial goals.
Last, a quick note that recent changes to the tax law affect these loans, as well. From 2018 to 2026, borrowers can’t deduct the interest on these mortgage payments unless the funds are used to buy, build, or substantially improve the buyer’s home.
Deductions on interest are capped at $750,000 of loans per married couple or $375,000 of loans for a married taxpayer filing separately. (These amounts include the primary mortgage, as well.)
If you have any questions about how a getting a HELOC or home equity loan might help you take advantage of the equity you’ve built up in your home, give us a call! We’ll help you figure out what the best step for your unique situation is.
“With this being my first home purchase, my loan officer was very good at explaining everything to me and helping me with all my needs. Thank you for having such great people in the right place!”
- Cathleen H.
“David Honda and his team rocked!! They had great technology that took so much of the pain of home buying away. They were attentive to our specific needs and were on top of our loan process! David was always available, even when he was in Hawaii, and super responsive! Thanks David, Melissa and the team for an easy and great home buying experience.”
- Raymond F.
“Faye helped me purchase my first home last year. She was very professional and worked very quickly to help me procure financing. She made herself available around my schedule and took the time to explain my options for financing to help me get the lowest rate possible. Would highly recommend her to anyone looking for someone that is professional, highly knowledgeable, polite, and responsive.”
- James Z.
“This review is about Mark and Darci Richardson from CSMC Mortage in Simi Valley. This team is the BEST! For the past 12 years our home was "underwater" due to the "crash" in 2007, and unable to do anything with the mortgage except pay it. These two kept on top of things and finally the house qualified to REFI. We just completed everything and it closed last week... and they saved us over $900 a month!! That's a huge savings for a couple of senior citizens! We are SO happy now and finally can breathe. Thanks to Mark and Darci and CSMC Mortgage for following through, jumping through all the hoops necessary and helping us out! I can't recommend them more... they are the BEST!!!”
- Shari S.
“Baret Grigorian was amazing!! From start to finish Baret was there to help in every way. I never felt like I had to call him to follow up on my loan transaction and he always kept me informed. He was able to get me great financing rates, a lower payment AND money back! Thank you Baret!! I look forward to working with you again in the future!!”
- Kenny D.
“I had the best experience with CSMC Mortgage. Buying a home is very stressful with all of the paperwork that has to be filled out. Faye was amazing! I have given several people her contact info, who are scared to take the step to homeownership. She took ALL of the stress away for me. I honestly, didn’t have to do much. She accommodated my crazy work schedule and help me get things done in a timely manner. She made me feel so comfortable and at ease. There were no surprises when it was time to sign and pay. I highly recommend her to anyone in need of her services and guidance. I can’t thank her enough.”
- Lisa M.
“These folks are conscience and easy to work with. The “calm” as the “storm” of home loans rolls through! I would not use anyone else. They make sure ALL your questions are answered, be that what competitors may have offered, or ads you may have heard or seen. What a pleasure to do business with. Thank you team CSMC.”
- Michael G.
“CSMC Mortgage took great care of us and our home buying needs. Tony was more than we could have ever asked for, he went above and beyond for us and we couldn’t have been more grateful for all his hard work. CSMC Mortgage has a great and friendly staff, I would highly recommend them to anyone looking into buying a home.”
- Jannet A.