Chances are your home is the most valuable asset you own. But what good is an asset unless you can use it? There are two ways to get a pile of cash out of your biggest investment without selling it: home equity lines of credit and home equity loans. It’s confusing because the wording is similar, but a HELOC and a home equity loan are not the same thing.

Home Equity Loan

A HELOC allows you to draw out money as you need it, while a home equity loan, aka second mortgage, gives you a lump sum of dough. You then make monthly payments until the loan is paid off. Home equity loans have a fixed interest rate, which is good… but the rate is higher than first-mortgage loans, which is less good.

Home Equity Line of Credit

You can get a home equity line of credit based on the value of your home, the amount of equity you have in it, and your credit score. You can use as much or as little of the money as you want, provided you make your monthly payments on time. Most HELOCs come with their own credit card so it’s easy to make purchases. But HELOCs have variable interest rates, and variable rates mean your minimum payment could change as often as every six weeks depending on Federal Reserve action.

Which is better?

HELOCs are typically used for stuff like getting a new roof, installing those energy-efficient impact windows, replacing old HVAC, or bringing your renovation fantasy to life. You can use as much or as little of the line of credit as you need. You don’t have to use all the money (and start making big payments) immediately. You can pay for things as your project unfolds, even if it that’s years.

Second mortgages, on the other hand, are generally used to pay big debts that you’ve already incurred. For example, if you got in over your head with credit card debt, taking out a second mortgage to pay it all off could be a tremendous relief, especially if your interest rate on your second mortgage is less than the interest rate on your credit cards.

The downsides

Neither a HELOC nor a second mortgage should be entered into lightly. There’s risk involved because both types of loans are secured by your home, and if you don’t make your payments, you could lose it. Oh, and through the first half of 2021, the average HELOC rate was about 5% while the average home equity loan rate was 6.8%. Oof.

Christy Rosen Clement is a Pricing Strategy Advisor®, Seller Representative Specialist®, Military Relocation Professional® and REALTOR® at Palermo Real Estate Professionals in South Tampa