HELOC vs Home Equity Loan Calculator

Which Second Mortgage is Right for You?

If you have a 3% interest rate on your primary mortgage, you definitely don't want to refinance the whole house just to get cash for a kitchen remodel. Instead, you need a "Second Mortgage" in the form of a HELOC or a Home Equity Loan.

The Home Equity Line of Credit (HELOC)

A HELOC acts like a giant credit card tied to your house. You are approved for a certain limit, but you only pay interest on the money you actually withdraw.

• The Pros: Very flexible. During the "Draw Period" (usually the first 10 years), you only have to make interest payments, keeping your monthly obligation extremely low.
• The Cons: The interest rate is variable (usually tied to the Prime Rate). If the Federal Reserve raises rates, your payment goes up automatically. When the draw period ends, you are forced to pay back the principal, which can cause "Payment Shock."

The Home Equity Loan

A Home Equity Loan acts like a traditional car loan or mortgage. You get a single lump sum of cash up front, and you pay it back over a fixed term (like 10 or 15 years).

• The Pros: 100% predictable. The interest rate is fixed, and your monthly payment will never change. You are paying down principal from Day 1.
• The Cons: The initial monthly payment is higher than a HELOC because you are paying principal immediately. You also pay interest on the full lump sum immediately, even if you don't spend it all right away.

The Verdict

If you need cash in stages over time (like paying contractors as a remodel progresses), a HELOC is better. If you have a single, large expense right now (like paying off high-interest credit card debt) and want fixed predictability, a Home Equity Loan is better.