What is a HELOAN (also known as a Home Equity Loan)?
What is a HELOAN?
A HELOAN is shorthand for "home equity loan" and is a type of secured loan that allows you to borrow money using your home's equity as collateral. The more equity you have in your home, the more you can borrow. In many cases, you can borrow up to 80-90% of the equity you have in your home. For example, if your home is worth $500,000 and you still owe $350,000 on your mortgage, then you have $150,000 in equity ($500K - $350K = $150K). This means you can generally borrow up to 90%, or $135,000, in a HELOAN.
What is "equity"?
Equity is the amount your property is currently worth, minus the amount of any existing mortgages on your property. Like in the example above, if your home is currently worth $500,000 and you still have a mortgage of $350,000, then your "equity" is $500,000 minus $350,000 which comes out to $150,000.
Tip from the CFPB
Here's a tip from the Consumer Financial Protection Bureau (CFPB):
Be careful about borrowing against your home as part of an investment strategy. There is no such thing as a "risk-free" or "guaranteed" investment. You should carefully consider all your options before you borrow against your home to invest. All investments can lose value and that could put your home at risk if you cannot repay the loan later on.
What is the difference between a HELOAN and a HELOC?
A HELOAN (Home Equity Loan) gives you a lump sum of money with fixed interest rates and consistent monthly payments over a set term, offering predictability and stability. In contrast, a HELOC (Home Equity Line of Credit) provides a revolving line of credit with variable interest rates and flexible payments, allowing you to borrow as needed up to a certain limit. While a HELOAN offers a fixed amount and steady payments, a HELOC offers more flexibility but with potentially fluctuating payments.
One additional point to make that AI didn't explicitly mention above: With a HELOC, you can re-borrow the same funds after you pay down the balance. For example, if your HELOC is $50,000 and you made draws of $10K, then once you pay back the full $10K (plus interest), you still have $50K to borrow from. It's sort of like a big credit card. HELOANs do not have this feature. They're more like typical mortgages in that you are borrowing a lump sum up front, and paying it down over time.
How does a home equity loan (HELOAN) work?
With a HELOAN, you receive money as a lump sum up front. A home equity loan usually has a fixed interest rate (one that will not change). If you cannot pay back your home equity loan, the lender can foreclose on your home so you have to be careful and make sure you are able to afford the payments with interest and that you are using the funds for a worthy purpose. Traditional home equity loans come with a fixed repayment term, similar to conventional mortgages. Borrowers make regular payments that cover both principal and interest. If the loan isn't repaid, the home could be sold to settle the outstanding debt, just as with any mortgage.
What is a good use of a HELOAN home equity loan?
A home equity loan can be an effective way to turn the equity in your home into cash, particularly if you use it for home improvements that boost your property's value. However, keep in mind that you are using your home as collateral, so if real estate values drop, you might end up owing more than your home is worth.
Before applying for a HELOAN, consider advice from a credit counselor
Before taking out a home equity loan / HELOAN to improve your house or consolidate your debts, you may want to consider talking to a qualified credit counselor to help you weigh your options. Read about credit counseling at ConsumerFinance.gov.