Home Equity Loans vs. HELOCs: Understanding the Key Differences

What would you do if you had the money to accomplish it?

Maybe you would tackle that kitchen renovation you’ve been dreaming about? Or you could update your bathroom for a spa-like experience. What about consolidating high-rate debt, taking a family vacation, covering education costs or funding a wedding?

There are probably a few things on that list that resonate with you. With a home equity loan or line of credit, several of your to-do list items become possible.

Home equity loans usually have lower interest rates than credit cards. You can also borrow a larger amount. This is because the loan is backed by the value of your home. (You may have heard home equity loans called second mortgages as well.)

There are several benefits to using a home equity loan or home equity line of credit. Your goals will help determine which type would work best for you.

So, what is home equity, and what’s a home equity loan? Let’s break it down.

Home Equity Basics

Home equity loans let you use the equity you have in your home. They offer a low-rate loan based on your home’s value. If you have a mortgage on your house, you essentially share ownership of it with a bank until you fully pay off that loan.

Equity represents the portion of your home’s value that you own, as opposed to the portion owned by the bank. To determine home equity, subtract your outstanding mortgage balance from the current market value of your home. Your equity grows each time you make a mortgage payment and whenever your home’s value appreciates.

To give you a concrete example, let’s say…

The market value of your house is currently: $300,000
Your mortgage value is $200,000 (the amount the bank owns)
So, your home’s equity is $100,000 (the value you own)

This probably goes without saying, but building home equity is important, because it means you’re building wealth. If or when you sell your home, you’ll receive the home equity amount. And you can also borrow your equity at a low interest rate and use it for whatever you like.

Two types exist: a home equity loan and a home equity line of credit.

Home Equity Loans

Best for expensive projects or endeavors: Renovations, debt consolidation, wedding expenses and more.
Fixed rate and term: With a fixed rate and repayment term, you’ll know how much your payments are for the entire length of the loan.
Lump sum: The bank deposits the entire loan amount in your account, which is why it works best for big-ticket expenses.

Home Equity Line of Credit (HELOC)

Best for ongoing projects or smaller expenses: Home projects, medical expenses, vacation, emergency funds, car repairs and more.
Variable rate: The rate fluctuates based on the current market rates, so your monthly payment will fluctuate as well.
Revolving credit: Just like a credit card, a home equity line of credit has a specified limit. You can borrow up to your limit, and you’ll only pay interest on your current balance.

Benefits of Home Equity Loans

There are three main benefits.

You benefit from lower interest rates. As previously mentioned, these loans generally have a lower interest rate than credit cards or personal loans. So, they’re a more affordable form of financing.
With a home equity loan or HELOC, you can often borrow more money than with other loans. This is because the funds are secured by the value of your property.
They’re also incredibly flexible. No matter what you need or want to accomplish, you can tackle it with a home equity loan.

Four Things to Consider Beforehand

Closing costs and fees: Unlike other loan types, there are closing costs associated with home equity loans. At Security Federal Savings Bank, we keep our fees and closing costs low. This helps make the loan easier for our customers to access.
Adding to your debt: Like any loan, think about your monthly payments. Make sure you feel okay with paying the loan back over months or years.
Risk of negative equity: This situation is rare. If your home’s value drops while you are paying your mortgage, you may owe more than your home is worth. Nationwide, the average of mortgage holders who have negative equity is just 2.1%. [2] It’s unlikely to occur, but important to be aware of.
Using your home as collateral: The most significant risk is using your home as collateral. In a bad situation, not paying back your loan could make the lender start foreclosure on your home. The outcome rarely comes to that, because there’s a lengthy process that occurs before a home ever enters foreclosure. So again, this is unlikely to occur, but it’s another important aspect to be aware of.

Come To Us for Your Home Equity Loan Needs

You have many choices when picking a lender. However, Security Federal Savings Bank stands out as one of the best home equity loan providers.

Our home equity loan intro rate is 2.99% APR.* On top of our already-low interest rates, you’ll benefit from an even lower intro rate. The low intro rate has a big impact on monthly payments, allowing you to pay less.
You’ll benefit from ongoing competitively low rates and fees. Because we’re a local bank, our priorities have (and always will be) our local community. We’re here to help you thrive, so we offer very competitive loans.
We offer a variety of options. Home equity loans give you a lump sum with a fixed rate. Home equity lines of credit offer a revolving line with a variable rate. Interest-only home equity lines of credit have lower payments, because you’re paying only the interest, not paying down the principal.
You’ll receive the same attentive, personalized service you know and love. We’re proud to help you achieve your dreams and goals.

Applying With Us Is Easy

Interested in getting started? Whether you’re a current customer or new to us, our paths to a home equity loan are simple.

For a home equity loan, go to the Home Equity Fixed Term Loan page on our website, where you can start a loan application. If you want to learn more about it, you can also opt to contact one of our lenders for information.

For a home equity line of credit or an interest-only home equity line of credit, visit our HELOC webpage and start an application, or contact a lender.

Here for You

Whether you decide to get a home equity loan or not, we hope this article has helped you better understand your options. If you have any questions, don’t hesitate to reach out to us! We’re always here for you.

*Annual Percentage Rate (APR) of 2.99% applicable to Home Equity Line of Credit Agreements for a period not to exceed 180 days from the date of execution of the Agreement and accompanying Mortgage. After the expiration of the 180-day period, the annual percentage rate shall be determined by the terms referenced in your Agreement. Maximum APR 18%. Origination fee $250. To be eligible for the introductory rate of 2.99%, you must have or open and maintain a checking account at Security Federal Savings Bank with a direct deposit. Security Federal Savings Bank reserves the right to discontinue this offer at any time. Additional restrictions may apply.