HELOC vs. Home Equity Loan vs. Refinance | Right Home Loan for You


Learn about some home loans that may be right for you.

You have equity in your home (it’s worth more than your current mortgage balance) and you want to tap into it, but you have three options – the home equity loan, or home equity line of credit or a traditional mortgage refinance.

They each provide access to your home equity but have different terms and uses. Read on to learn which option may be right for you.

What is a Home Equity Loan?

A home equity loan is a second mortgage. You leave your first mortgage untouched, use the home equity loan to tap into the accessible equity available.

The accessible equity is the difference between 80% of your home’s value and your current mortgage balance. For example, if your home is worth $300,000 and you have a $100,000 mortgage outstanding, your accessible home equity is $140,000.

With a home equity loan, you could borrow the entire $140,000, receiving it in one lump sum. You make principal and interest payments on the full amount with a term of 10 – 30 years depending on the loan program chosen.

What is a Home Equity Line of Credit?

A home equity line of credit is also a second mortgage, but it works differently. You still leave your first mortgage untouched and use the HELOC to access up to 80% of your home’s equity minus the amount of your first mortgage.

With a HELOC, you don’t have to receive the full amount of the funds in one lump sum. You don’t have to receive any funds in hand if you don’t need them yet. It works like a credit card. You get a credit line and can access the funds as needed. You’ll receive either a checkbook or a  debit card to withdraw the funds as needed.

If you withdraw funds, you’ll pay interest on the amount you withdrew only. You have the option to make interest-only payments or pay principal and interest payments during the first 10 years, which is called the draw period.

After the draw period ends, your HELOC works just like the home equity loan. You can’t draw on it any longer and you make principal and interest payments to pay the loan in full, usually on a 20-year term.

What is a Home Mortgage Refinance

Refinancing is simply a completely new mortgage, not a second debt or payment each month. In most cases, the interest rate will be lower than either a Home Equity loan or HELOC. Mortgage refinancing allows you to borrow against the equity in your home, just like the other two loan types, but you have flexibility on terms (years of the loan) and likely lower interest rates. You must, however, receive the funds in a lump sum right away.

Your Home is the Collateral

One thing both the HELOC and home equity loan have in common is that you use your home as collateral. Both loans take a second lien position, but you put your home at risk if you default on either type of loan. Before you take out either a HELOC or home equity loan, make sure you can afford it. 

Which One is Right for You?

Deciding whether a home equity loan, mortgage refinance or HELOC is right for you depends on why you need it. Ask yourself these questions:

  • Will you need future access to funds or do you have a single amount of money needed? If you’re making home improvements, for example, you may need access to a line of credit should there be unforeseen expenses. If you’re using the money to pay off credit card bills, though, you need a lump sum and that’s it making a home equity loan a better fit.
  • Are you taking the funds to have ‘just in case’? If you don’t have an emergency fund available and you want to liquidate your home’s equity to use the emergency fund, a HELOC may be a better option. You don’t have to make payments unless you use the funds.
  • Do you prefer a fixed interest rate and term? A HELOC usually has a variable interest rate, which means you may have a higher or lower payment each month. A home equity loan has a fixed interest rate that never changes, making it easier to budget.
  • A mortgage refinance is simply a new mortgage, allowing you to take advantage of your equity. It’s usually less costly (lower interest rate), but you must take all the proceeds immediately. 

Bottom Line

If you have equity in your home, now is a great time to take advantage of it. A home equity loan, HELOC or mortgage refinance gives you access to the money you’ve earned in your investment at various rates and terms.

Think about why you want the funds and how you’ll use them to choose the loan that’s right for you. A HELOC is more well-known because of the ability to draw on the balance, but watch out for its variable interest rates. Make sure you have room in your budget for a fluctuating payment or choose the home equity loan for more stability. If you want all to borrow against the equity you have in your home and desire a likely lower interest payment and lower monthly payment than the other two options, choose a mortgage refinance.

If you’re ready to tap into your home’s equity, let’s connect today and we’ll help you decide which loan is right for you. 

Contact Valley Mortgage in Fargo, ND

If you’ve decided it’s time to buy borrow against the equity you built up in your current home, you have options. Give us the opportunity to discuss options with you. Our Valley Mortgage professionals are happy to walk you through your options and match you up with the perfect loan program. We have many options available for borrowers with almost any credit score, amount of equity, or home financing requirements. We don’t offer HELOC or Home Equity loans, but we have many Mortgage Refinance options available that we believe you will find attractive.

Contact us for a no-obligation conversation. Valley Mortgage is the largest independent mortgage lender in North Dakota and northern Minnesota. We’ve be helping folks like you for more than 38 years. If you haven’t reviewed our website, click here. Please call us at 701-461-8450 to get all the details about home mortgages and refinancing. There’s no cost, no obligation. Valley Mortgage does all the processing right here in our Fargo, ND office.