HELOC vs. HELOAN - What Are The Differences?

What is the difference between a HELOC and a HELOAN?

1 Answer

This is a fairly straightforward question.

Simple answer:

HELOC = home equity line of credit

HELOAN = home equity loan

A HELOC will almost always be an adjustable rate mortgage that acts as a line of credit secured against your house. In some cases you might get a check book, or even a debit card to make "draws" against accumulated equity.

For instance if your house is worth 400k, and you have a first loan of 200k, you could very likely obtain a HELOC with a maximum amount of 100k. The benefit is that you can draw that 100k as needed. For example, if you draw $0.00 to start, you'll have $100,000 of credit, waiting to be tapped, tied to your home equity. You could draw $5.00 to buy lunch or $500 to buy a barbecue, or even $50,000 to buy that boat I've always wanted.

Your payments will then be based on the amount borrowed and the interest rate. This will almost always be simple interest based on the PRIME rate (8.25% for this example) plus or minus a fixed margin. In other words, if your margin is Prime + .75. and you borrow 100,000. then your payment would be:

100,000 X 0.09 = 9000

Then divide by 12 to get payment of $900.

A HELOAN is the same thing except you cannot draw against it. It's a one time deal, usually a fixed rate, and for all intents and purposed is analogous to a first mortgage. The only real difference is that the interest rate on home equity products is generally higher.

Some people have begun to refer to HELOC and HELOAN interchangeably. If it's a situation where it makes a difference to you, such as someone talking about a loan you qualify for, it would behoove you to clarify.

HELOANs generally offer lower fixed interest rates, whereas HELOCs provide the flexibility of being able to be used as a line of credit, but are variable rates. A HELOC is an integral part of many " Mortgage Acceleration" products.

Finally, be aware that many HELOCS offer the ability to draw a portion of the available balance and "lock it" thus turning that chunk of money into a HELOAN.