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Finance Forum: Home Equity Line of Credit vs Home Equity Loan

Understanding the distinctions

When homeowners need access to funds for major expenses or projects, they often turn to home equity as a valuable financial resource. Two popular options for leveraging home equity are a Home Equity Line of Credit (HELOC) and a Home Equity Loan. While both options tap into the equity built in a property, they differ significantly in structure, repayment terms, and potential benefits for borrowers.

To understand which product will best fit your needs, you must first understand the differences. A HELOC is a revolving line of credit that allows homeowners to borrow against their home equity. It functions similarly to a credit card, offering borrowers a predetermined credit limit and a flexible borrowing period. As the borrower pays off the principal amount, the available credit replenishes, providing ongoing access to funds.

A home equity loan, on the other hand, is a lump sum loan obtained against the equity in a property. Unlike a HELOC, it is a fixed amount borrowed upfront, with a set repayment schedule and fixed interest rate. This loan is typically disbursed in a single installment, making it suitable for one-time expenses or debt consolidation.

The choice between a HELOC and a home equity loan depends on the borrower's specific circumstances. To provide insight into the matter, Kandis Gray, Union State Bank’s Director of Mortgage Processing and Servicing, has weighed in on the pros and cons of each option.

"A HELOC offers borrowers the flexibility to borrow as much or as little as they need, within the predetermined credit limit," explains Gray. "This adaptability can be particularly advantageous for homeowners with ongoing or varying expenses, such as significant home renovations or tuition fees."

Other advantages of a HELOC, as compared to a home equity loan, include faster close times and the ability to write HELOC checks or transfer funds via online banking, making them a faster and more flexible option for accessing home equity.

For certain borrowers, a HELOC may not be the best option.

"HELOCs typically come with variable interest rates, meaning the monthly payments can fluctuate," said Gray. "This variability can make budgeting more challenging for some borrowers."

Additionally, the revolving nature of a HELOC can tempt borrowers to rely excessively on their home equity, leading to a higher debt burden if not managed responsibly.

On the other hand, a Home Equity Loan generally offers a fixed interest rate.

"The fixed interest rate typically offered with home equity loans provides borrowers with predictable monthly payments," states Gray. "This stability can be attractive to homeowners seeking budgetary consistency."

Many borrowers also find it advantageous that a home equity loan is disbursed upfront as a single payout. These lump sum payments tend to work best for borrowers with specific, one-time expenses, such as large medical bills or consolidating high-interest debts.

Home equity loans aren’t as flexible as a HELOC. Once the loan is disbursed, borrowers cannot access additional funds unless they apply for a separate loan, making it less suitable for ongoing or unpredictable expenses.

To determine which option is suitable for their specific situation, borrowers should consider asking the following questions:

  • What is the purpose of the funds I need?
  • Is it a one-time expense or an ongoing need?
  • How much flexibility do I require in accessing funds?

Union State Bank provides additional information regarding both HELOCs and home equity loans on their website, www.MyUnionState.Bank. The team at your closest Union State Bank branch is able to assist or call toll free at 866-557-0060.

About Union State Bank: Founded in 1908, Union State Bank has banking locations serving communities of Arkansas City, Newton, Udall, Winfield, and Wichita in Kansas and in Bartlesville and Edmond, Oklahoma. Union State Bank offers a full range of electronic, deposit and cash management services, as well as business and agriculture, commercial real estate, construction, mortgage, residential and consumer loans. Member FDIC. Equal Housing Lender, NMLS# 412388.