Choosing a home equity loan or HELOC: What pros say to look for

If you want to tap into the value you’ve built in your home, you have several options. Among the most common are home equity loans and home equity lines of credit (HELOCs).

A home equity loan is a type of loan that gives you a lump sum of money, which you pay back over a set period of time at a fixed interest rate. A HELOC is a line of credit that lets you borrow money up to a pre-approved limit, usually at a variable interest rate, and pay only the amount you actually borrow over time.

There are plenty of different home equity loans and HELOCs on the market, and choosing among them can seem overwhelming. To help you find the best product for you, we asked real estate professionals the most important factors to consider.

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Choosing a home equity loan or HELOC: What pros say to look for

Here’s what experts say you should keep in mind when evaluating your home equity borrowing options:

How you plan to use the funds

The first step is determining whether a home equity loan or a HELOC is better for how you want to use the money you borrow.

“The best type of loan for you will depend on your individual circumstances and needs,” says Mike Qiu, real estate agent and owner of Good As Sold Home Buyers. “If you know how much money you need and when you need it, a home equity loan may be a good option. You’ll get the money upfront, and you’ll have a fixed interest rate for the life of the loan. This can give you peace of mind knowing exactly how much you’ll owe each month.”

On the other hand, Qiu says, “If you’re not sure how much money you need or when you’ll need it, a HELOC may be a better choice. You can borrow as much or as little as you need, and you can make payments as often as you like. This gives you more flexibility, but it also means you’ll need to be more disciplined about managing your debt.”

See your home equity borrowing options here.

Loan terms

Once you’ve decided whether to get a home equity loan or HELOC, review offers from multiple lenders and compare their terms.

For example, Deni Supplee, Realtor and cofounder of SparkRental, recommends looking at the following loan terms (among others) when choosing a HELOCs:

• Introductory rate: “Sometimes HELOCs come with a low introductory rate, which then jumps upward after that initial introductory period,” says Supplee. “Make sure you understand exactly how long that introductory period lasts, and how the rate will be calculated after it ends.”
• Draw period: “HELOCs typically come with two phases: a draw phase (where you can draw on or pay down the line of credit as you like) and the repayment period (when you must pay down your balance like a fixed installment loan or mortgage). Double-check how long the draw period lasts, and consider looking for HELOCs with longer draw periods,” says Supplee.
• Minimum withdrawals: “Many HELOCs require you to take a certain amount upfront, but that can defeat the purpose of flexibility and a rotating credit line,” Supplee says. “You can end up paying interest on borrowed money you don’t actually need right now.”

For both home equity loans and HELOCs, review terms such as:

• Repayment terms: “Some loans require you to make repayment for both principal and interest immediately, while other options offer interest-only payments initially,” says Theresa Raymond, principal broker and owner at TN Smoky Mtn Realty. “You need to determine which of the repayment structures would best fit your preferences and financial situation.”
• Prepayment penalties: “For both HELOCs and home equity loans, confirm whether the lender charges a prepayment penalty, and if so, after what period,” says Supplee. “If you need to move for work, for example, and sell your home earlier than planned, the lender could hit you with a nasty penalty.”

Check out today’s top home equity rates here.

Total cost

Interest rates aren’t the only thing that affects how much you pay to borrow from your home equity. You’ll also pay closing costs and, potentially, other fees, such as annual fees (for HELOCs).

“Make sure you compare the total cost of any HELOC or home equity loan as you shop around,” says Supplee. “Add up all fees and projected life-of-loan interest to get a complete sense of each option’s cost.”

Begin your home equity product search by seeing top offers you can qualify for here.

Company ratings

Finally, look for a lender with a solid reputation and track record when you’re comparing offers. Borrowing from your home equity is a significant financial undertaking that can affect you for years to come, and you want to work with a company that’s transparent and responsive.

“Research the lender’s reputation and the quality of their customer service and support,” says Raymond. “Try to find a lender who offers top-of-the-class customer support, offers excellent resources and responds to concerns and inquiries cordially.”

The bottom line

As with any financial product, it’s essential to do your research and consider your overall budget and goals when deciding which home equity loan or HELOC is best for you. By identifying your needs, comparing loan terms and total costs and reviewing company ratings, you can find the product and lender that gives you the best deal for your needs.