HELOC and Home Equity Loan Options

Homeowners borrow against the equity they’ve built in their home for any number of reasons: home improvements, debt consolidation, educational costs, or significant life events. With home values steadily increasing or holding firm, the equity you have in your own home most likely has also increased. This may leave you wondering if you should take advantage of that appreciation by borrowing against it. 

HELOCs¹ and home equity loans let you use the equity you have built, but in different ways. Determining the path that works best depends on how your personal set of circumstances align with the structure and guidelines of each.

What Is a HELOC?

A HELOC is a home equity line of credit,¹ a type of second mortgage. It’s often likened to a credit card in how it works, but it’s a revolving line of credit secured by the equity you have in your home. Because it’s linked to your home’s equity, if you sell your home, whatever portion of the HELOC that you have used will have to be satisfied along with your primary mortgage.

How It Works: Your financial institution will appraise your home and set up a line of credit for a certain amount, the line of credit’s credit limit. Lenders typically set that amount by calculating loan to value (LTV) and combined loan to value (CLTV).

• To calculate LTV, divide what you still owe on your mortgage by your home’s current appraised value.
• To calculate CLTV, add the amount you want to borrow to what you still owe on your mortgage. Then divide that figure by your home’s current appraised value.

As a rule, lenders will allow HELOCs valued at up to 80 to 85 percent of the CLTV. However, some federal programs may allow an even higher percentage.

If you take out a HELOC on your home, your lender will open a line of credit with a credit limit. You can use, or draw on, as much or as little of that amount as you want when you want. Most HELOCs have a draw period of 10 years, but some may offer shorter or longer periods. During that time, you can access the credit available and use it to purchase goods and services as you choose.

Much like a credit card, any purchases made will initiate monthly payments at a variable interest rate that rises and falls with the financial supply and demand of credit. While some HELOCs will require payments of interest and principal, others may require interest-only payments.

At the end of the draw period, HELOCs enter a repayment period. You can no longer draw funds but must steadily repay what you’ve used of the line of credit. During the repayment period, the interest charged may switch from a variable rate to a fixed one, and the amount to be repaid includes principal plus interest.

HELOCs may entail closing costs that represent two to five percent of the loan, but some lenders offer low- or no-cost closings. A home appraisal is usually required. Other fees may include an origination fee, as well as fees for obtaining credit reports and notary services, performing the title search, preparing documents and recording the loan.

Pros and Cons of a HELOC: Like any financial transaction, HELOCs offer a benefit with considerations.

Pros

• A HELOC provides a substantial line of credit. Money is available, but you repay only what you use.
• Draw periods may be 10 years or more.
• Interest rates may be variable but are typically much lower than those of credit cards, for example.
• Many lenders offer low- or no-cost closings to their customers for HELOCs.

Cons

• Because HELOCs have variable interest rates during the draw period, payments may rise if interest rates increase.
• Making interest-only payments during the draw period does not pay down principal, the borrowed amount.
• Extended draw periods require discipline to avoid overspending.

What Is a Home Equity Loan

A home equity loan is also a type of second mortgage. Like a HELOC, the loan amount is secured through the equity you have in your home and must be satisfied if you decide to sell your home. Likewise, most lenders will allow loans up to 80 to 85 percent of the CLTV.

How It Works: If you take out a home equity loan on your home, your lender will release a lump sum that represents the total agreed-upon loan amount that you’ve qualified to borrow. Depending on circumstances, the funds may be released directly to you to disburse, or the lender may pay funds to creditors or contractors for you, for example. Often, the lender must approve the loan’s use.

Since the total amount has been released, repayment begins immediately with regular monthly payments of principal and interest. Home equity loans usually have a fixed rate that will endure for the life of the loan, so payments are usually the same each month and straightforward to budget.

Like HELOCs, home equity loans may come with closing costs to cover a home appraisal as well as origination fees and fees for the title search, notary services, document prep and loan recording.

Pros and Cons of a Home Equity Loan: Home equity loans also provide a valuable financial service but with considerations.

Pros

• You can borrow a substantial amount of money for a major home project, for example, at a reasonable cost.
• home equity loans typically have fixed interest rates, so payments remain the same and include principal and interest.

Con

• Repayment begins immediately for the entire amount of the home equity loan. The home equity loan monthly payment will be in addition to your mortgage payment.

Differences Between HELOCs and Home Equity Loans

Both HELOCs and home equity loans let you access the equity you’ve built up in your home, but the borrowing processes differ in three key ways.

1. The home equity loan delivers a total lump sum immediately. The HELOC opens a home equity line of credit, an amount that is available for you to draw on as needed over a period of time—often 10 years or more.
2. Home equity loans typically have a fixed interest rate. HELOCs typically have variable interest rates during the draw period that can rise or fall with the market. HELOCs may switch to a fixed rate at the end of the draw period with the start of the repayment period.
3. Repayment on a home equity loan begins immediately, with a fixed, equal payment amount applied monthly to the principal and interest for the life of the loan. Repayment on a HELOC addresses only the portion of credit used. During the draw period, repayment may be interest-only or include both interest and principal depending on the terms and conditions associated with the line of credit. Once the draw period ends, repayment is similar to the fixed-rate amortized monthly installations of principal and interest.

All three of these factors focus on timing. The home equity loan accesses and spends the money immediately. The home equity line of credit opens a resource that you may or may not decide to use in whole or in part at some point in time during the draw period.

HELOC Versus Home Equity Loan: Which Is Best for You?

Deciding whether to apply for a home equity loan versus a HELOC really depends on your set of circumstances and how you plan to use the money.

• Home equity loans may be more advantageous if you need a large sum immediately. If, for example, you want to add a master suite with another bathroom to your home or complete a major renovation that is likely to increase the value of your home, a home equity loan can give you the funds along with an equal, fixed payment schedule that you can evaluate as to whether you can afford the loan.
• HELOCs may be more advantageous if you may need smaller sums over a period of time but you’re not exactly sure how much you’ll need or when you’ll need them. For example, if you own a home that may need updates and substantial maintenance over time, a HELOC may be useful. Funds will be available when you need them, and you’ll only pay for what you actually use.

Both home equity loans and HELOCs can be used for anything — from home improvements or the purchase of a second home to car purchases, medical expenses or educational costs. Which one is right for you will depend on how much money you need initially and the repayment options you can afford. The important fact to remember is that both are second mortgages that depend on your home maintaining its value or even increasing in value.

Putting Your Home Equity To Work at La Cap

La Capitol Federal Credit Union offers both home equity loans and HELOCs to its members. Both are great ways of using the equity you’ve built in your home for the things you need to accomplish in your life. Do you need funds for a major expenditure now, or do you need access to a line of credit that will serve you over time? It’s all up to you. Find out what your home is worth, and let your equity work for you. Reach out to one of our experienced representatives and find out just how much La Capitol can do for you.

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NMLS# 411413

APR = Annual Percentage Rate. HELOC interest rates are variable, based on an index plus a margin. The index is PRIME as published in the Wall Street Journal. The introductory rate is as low as 3.99% APR and is effective for 6 months (180 days) from the consummation date. The non-introductory APR range is 7.25% to 13.00% as of Effective date: 10/01/26. The minimum loan amount is $10,000. La Capitol FCU will pay up to $1,500 of closing cost. Closing cost does not include full appraisal fee if appraisal is required. La Cap will pay the closing costs; however, these costs will be charged back to the borrower(s) if the HELOC is closed within twenty-four (24) months of origination. Other restrictions may apply. Equal housing lender. NMLS # 411413. Effective date: 10/01/26