Whether they are elite corporate CEOs, college students, or middle-aged homemakers, most people borrow money at some point in their lives. In fact, according to Lending Club, over $33 billion worth of loans have been lent as of the end of 2017.

The reasons an individual may pursue a loan is varied and can include the desire to attend college, receive a lump sum to start a business, or acquire a significant amount of capital for emergency expenditures. Regardless of the specifics, most people borrow money, merely because they evidently lack the savings or some high-value asset to spend on a high-value venture.

However, most people actually do have a high-value resource which they can leverage to acquire thousands, if not, tens of thousands of dollars: the home that they own. After all, houses are a necessity to live and, unlike many other consumer goods, are appreciating assets. As a result, many economists and market analysts consider home ownership to be a good investment.

Two of the best ways to leverage your home’s value is to secure a home equity loan or a home equity line of credit, commonly abbreviated as HELOC.

What is a Home Equity Loan?

Simply put, a home equity loan is a form of lending in which the borrower receives a specific amount capital using the equity of their home as collateral. The amount of money lent is based on the home’s market value and a percentage of the equity which the homeowner has.

Equity is the measure of how much money the owner has paid on their mortgage and the home’s total value. The percentage of equity from which the borrower can get can be set as high as 85%. As a result, the average homeowner with a ten-year or old mortgage and a moderately valued home could receive a loan ranging well into the tens of thousands of dollars.

The loan is given to the borrower as a single lump sum all at once and must be paid at a fixed interest rate.

It is worth noting, rather than be treated as a separate loan, the amount of money owed is added to the total amount of money still owed on the house. Consequently, a home equity loan is effectively a form of mortgage restructuring. Also, defaulting on home equity loan means running the risk of losing your house entirely.

What is a HELOC?

Being very similar to a home equity loan, the most noteworthy difference between the two is that a HELOC allows the borrower to withdraw varying amount of cash from a preestablished monetary threshold rather than receive a sum all at once. When using this line of credit, the borrower may not necessarily extract the total amount of money that they are limited to. Rather, they take as much money as they need during the lending period.

The other notable difference between a loan based on home equity and a HELOC is the way they are paid back. Specifically, with respect to interest home equity loans are always fixed, whereas HELOC rates may be fixed or could be adjusted, depending on the lender’s policy.

Interestingly, some banking institutions, even multinational ones, provide HELOCs exclusively. For instance, while they provide excellent lines of credit based on house value, Chase home equity loans do not exist.

Home Equity Loan v HELOC – Which Should You Use and When?

Before making a direct comparison, both home equity loans and HELOC plans have a wide variety of applications and be used to finance a number of expenditures.

For example, debt held on several credit cards can be easily paid for before the separate interest rates make the various credit card obligations unmanageable. To provide another example, home equity-based loans are often used to pay for college tuition or pay off student loans. Lastly, loans or lines of credit established based off of home equity are most frequently used to finance a home repair or improvement project.

Moving forward, a home equity loan is a better means to acquire cash for a “closed” expense. By “closed” we mean something in which the amount of money which need be spent has already been carefully tabulated. These expanses can include, for example, paying off an outstanding debt, provide funding for a relatives college expenses, or to conduct a home improvement project. It should be noted that the latter case is a good way to substantially raise the value of your house.

On the other hand, having access to an open line of credit from which to borrow can be good for “open” expenditures. The most common form of open expenditures includes emergency home repairs or other expenses in which the total amount of money which will be required isn’t known.