A HELOC (home equity line of credit) and a home equity loan are not the same. They do, however, have a couple of factors in common. Both types of loans allow you to access equity you have built in your home over years of making payments on your primary mortgage. HELOCs and home equity loans are also both secured the same way by using your home as collateral, usually with a second mortgage.
How Do HELOCs and Home Equity Loans Differ?
- HELOCs are revolving lines of credit, which allow borrowers to draw and repay funds, as needed.
- With home equity loans borrowers receive the loan proceeds in a single lump sum.
- HELOC payments fluctuate, typically requiring interest-only payments or payments of interest plus a portion of the principal balance.
- Home equity loans feature fixed monthly payments.
- HELOCs often have variable interest rates that change with the prime rate.
- Home equity loans usually have fixed interest rates for the loan term.
How Much Can I Borrow with a HELOC or Home Equity Loan?
The amount available to you to borrow against your home with a HELOC or home equity loan depends upon a borrower’s credit history and income, but also the amount available is primarily based on the loan to value (LTV).
An LTV is expressed as a percentage and equals the amount of debt owed on the home, plus the amount requested, divided by the home’s appraised value.
For example, a borrower with $50,000 in debt on a $150,000 home has a 33% LTV. The maximum LTV allowed on home equity loans or HELOCs is regulated by the Federal government and also varies based on the underwriting policies of individual banks and credit unions.