Learn the differences of a HELOC vs Home Equity Loan and how to turn your home into cash.

HELOC vs Home Equity Loan: Uses and Benefits of Each

Fixed rate home equity loans and home equity lines of credit (HELOCs) are powerful tools that can give homeowners access to the equity they have built in their homes. If you’re a homeowner who needs to borrow money, these options may be more attractive than other types of loans due to their favorable interest rates, fixed or adjustable terms, and ease of accessing funds. So what are the differences and which is better when it comes to HELOC vs home equity loan.

HELOC vs Home Equity Loan

One of the key differences between HELOCs and fixed rate home equity loans is how you access the funds. HELOCs are a revolving line of credit that you can draw on as needed, up to a pre-determined credit limit. You only pay interest on the amount you actually use, and the repayment term is typically longer than fixed rate home equity loans. 

Fixed Rate Home Equity Loan, on the other hand, provide a lump sum of money that is paid back over a fixed period of time with fixed monthly payments. The main advantage of a Fixed Rate Home Equity Loan is that the interest rate is typically fixed, meaning you know exactly what your payments will be over the life of the loan. In contrast, a HELOC may have an adjustable interest rate that changes over time. Both types of loans can be used for similar purposes, such as home renovations or debt consolidation.

Uses for Fixed Rate Home Equity Loan

Fixed rate home equity Loans are often used for large expenses, such as home renovations or consolidating high-interest debts, and because they are repaid over a fixed period, they give borrowers predictable monthly payments. You may use a Fixed Rate Home Equity Loan for:

  1. Major home renovations or additions – One of the most popular uses of fixed rate home equity loan is for financing large home improvement projects or additions. Whether you want to add a second floor to your home, remodel your kitchen, or install a pool, a Fixed Rate Home Equity Loan can provide you with the necessary funds to complete your vision.
  2. Consolidating high-interest debt – With interest rates that are usually much lower than credit cards or personal loans, a fixed rate home equity loan can be useful for consolidating and paying off high-interest debts such as credit card balances, medical bills, or personal loans.
  3. Covering unexpected expenses – You never know what life will throw your way – your car can break down, your HVAC system could fail, or you might need to deal with unexpected medical bills. When these scenarios occur, using a fixed rate home equity loan to get the funds you need can be a smart move.
  4. Investing in a second property – Using a fixed rate home equity loan to finance the purchase of a second property is something many homeowners consider. This can include a vacation home for weekend getaways, a rental property for generating income, or even a down payment on a home for your child.
  5. Funding a child’s education – Education is expensive, and the cost of attending college is only going up. If you don’t have the funds to pay for your child’s education out of pocket, using a fixed rate home equity loan to finance it can be a more cost-effective option.

Benefits of Fixed Rate Home Equity Loans

Uses for HELOCs

HELOCs also have their uses, and while they may not vary a ton from what you would use a fixed rate home equity loan for, there are some differences and benefits to using a HELOC. Some of those include: 

  1. Ongoing home improvement projects – If you plan to make significant home improvements over time, a HELOC can provide you with the funds you need as the project progresses. This provides you with the flexibility to use more funds as they are needed without requiring you to go through the borrowing process again.
  2. Supplemental income for a short period of time – In some cases, a HELOC can be a way to generate supplemental income for a short period of time. This can include temporary financial challenges due to job loss, or other personal or professional challenges.
  3. Covering large periodic expenses – From tuition payments to costly home repairs, there are plenty of expenses that arise once or twice a year. By using a HELOC, you’ll have immediate access to funds when you need them, allowing you to worry less about how you’ll cover these expenses.
  4. Serving as a rainy day fund for unexpected expenses – With a HELOC, you can draw on funds as needed when emergencies or unexpected expenses arise. This provides you with quick access to funds without having to go through a lengthy borrowing process.
  5. Starting a small business – For aspiring business owners, obtaining financing can be a challenge. A HELOC can provide you with the necessary funds you need to get your business off the ground, and it’s important to consult with a financial professional to determine if this is a viable option for you.

Benefits of HELOCs

Which one is right for you?

Overall, fixed rate home equity loans and HELOCs are powerful financial tools that can unlock the equity in your home, a valuable asset. These types of loans offer homeowners an array of options for managing their finances and can be used for home renovations, high-interest debts, unexpected expenses, education funding, and more. 

If you’re interested in exploring more about HELOC vs home equity loan and finding out which one is right for you, don’t hesitate to reach out to Members 1st of New Jersey Credit Union. Our friendly and knowledgeable team can provide you with the guidance and support you need to make the right financial decisions for your unique situation. Take advantage of the value you have built up in your home and secure a brighter financial future with our help.