Understanding Your Home Equity Options
Considering a Home Equity Line of Credit (HELOC) or a Home Equity Loan, but not sure which is right for you? You’re in the right place. Both options allow you to tap into the value of your home.
This decision guide will walk you through the key differences, benefits, and considerations to help you make the choice that best fits your financial goals.
Home Equity Loan & HELOC Decision Guide
What’s the Difference Between a Home Equity Loan and a HELOC?
Both options let you borrow against your home’s equity, but they work differently. A Home Equity Loan gives you a one-time lump sum with fixed payments, while a Home Equity Line of Credit (HELOC) works more like a credit card—offering flexible access to funds as you need them, either with a variable rate or a fixed rate for up to 60% of your line.
What is a Home Equity Loan and How Does It Work?
A Home Equity Loan is a fixed-term loan that allows you to borrow a lump sum using the equity in your home as collateral. You’ll repay it in fixed monthly payments over a set period, typically with a fixed interest rate—making budgeting easier and more predictable.
When Might a Home Equity Loan Be the Right Choice?
A Home Equity Loan may be a better fit if you need a specific amount of money for a one-time expense—such as a major home renovation, large medical bill, or debt consolidation—and prefer the stability of fixed payments.
Is a HELOC Better for My Needs?
A HELOC might be ideal if you’re tackling ongoing or unpredictable expenses. It offers revolving access to funds during a 10-year draw period—so you can borrow, repay, and borrow again as needed. After those 10 years are up, you can’t borrow any more, and you’ll begin repaying both principal and interest.
What Is an Interest-Only Payment?
An interest-only payment means you’re only paying the interest that accrues on your balance each month, without reducing the principal. We now offer an interest-only payment option during the 10-year draw period, which lowers your monthly payment – but keep in mind that the full balance will still need to be repaid later, often with higher payments once the repayment period begins.
What Are Some Common Uses for Home Equity Loans?
- Home Improvements – Upgrade your kitchen, bathroom, or add a room.
- Debt Consolidation – Pay off high-interest credit cards or personal loans with one low-rate payment.
- Major Expenses – Cover tuition, weddings, or other large, planned purchases.
What Are the Pros and Cons of Home Equity Loans and HELOCs?
Home Equity Pros:
- Interest rate is fixed.
- Monthly payments won't change.
Home Equity Cons:
- You immediately start making payments on both principal and interest.
- You have to know exactly how much you’ll need, and borrowing more money will require taking out another loan.
HELOC Pros:
- You only pay interest on the amount you draw, not the full credit line.
- You can borrow as needed, so you don’t have to know the exact amount you’ll need upfront.
HELOC Cons:
- Rising interest rates can increase your monthly payments.
- Your minimum monthly payments will increase during the repayment period when you have to pay down the principal.
How Does a Home Equity Loan Compare to a Cash-Out Refinance?
A home equity loan is a second mortgage, while a cash-out refinance replaces your current mortgage with a new, larger one. If you’re happy with your current rate, a home equity loan lets you borrow without changing your primary mortgage. A cash-out refi might make sense if you want to take advantage of lower interest rates and combine both loans into one.
When Is a Home Equity Loan a Better Fit Than a Cash-Out Refinance?
- You want to keep your current mortgage rate and term
- You need a separate loan with fixed payments
- You only want to borrow a portion of your equity
When Might a Cash-Out Refi Make More Sense?
- Your current mortgage rate is higher than today’s rates
- You want to simplify your payments into one mortgage
- You’re planning a large renovation or purchase and want to borrow more
Do I Qualify for a Home Equity Loan or HELOC?
To qualify, NGFCU requires:
- As low as 10% equity in your home
- A solid credit score (minimum of 600 FICO)
What’s the Application Process Like?
Applying is simple! Here’s what to expect:
- Submit an application online or with an NGFCU loan officer
- Provide documentation (income, mortgage info, etc.)
- Once approved, we’ll walk you through closing and disbursement
Frequently Asked Questions
How much can I borrow?
Up to 90% of your home’s value, minus what you owe on your mortgage.
Is the interest tax-deductible?
It can be if the loan is used for home improvements—check with a tax advisor to confirm.
Can I pay off the loan early?
Yes! Home equity loans and HELOCs have no prepayment penalties.
What’s the difference in repayment terms?
HELOCs only require interest payments during the 10-year draw period followed by a repayment period where you pay back what you borrowed. Home equity loans require you to pay interest and principal from the beginning.
Still have questions? Our team at NGFCU is here to guide you every step of the way. Whether you’re just exploring your options or ready to apply, give us a call at 888.NGFCU.RE (643.2873), email us at homeloan@ngfcu.us, or fill out the consultation form below to get personalized support.
Your Home, Your Equity, Your Trusted Advisor
Home Equity/HELOC Consultation
NMLS #774623. CLTV = Combined Loan To Value. All loan terms are subject to change without notice and based on credit approval. For variable rate loans, the rate may increase after consummation. No cash out refinances in Texas.