The IFCU Blog

After years of making mortgage payments, you've built equity in your home, and now you're wondering how to put it to work. Perhaps your kitchen is still stuck in the ‘90s and could use an update. Maybe your roof is reaching the end of its lifespan. You might even be curious about consolidating higher-interest debts into one simpler monthly payment. 

Two common financing options might be a good fit: a home equity loan and a home equity line of credit (HELOC). While both let you borrow against the equity you've built, they work in different ways. So which one is right for your financial situation?

Discover how each option works so you can make a more informed decision before you borrow.

What Is Home Equity?

Home equity represents the portion of your home that you actually own, free and clear of your mortgage.

For example, if your home is worth $350,000 and you still owe $200,000 on your mortgage, you've built approximately $150,000 in equity.

That equity typically grows over time, either as you pay down your mortgage or as your home's value increases, becoming a financial resource that you may be able to borrow against. 

Keep in mind that lenders generally don't allow homeowners to borrow their entire equity balance. Your credit profile, along with other qualification requirements, can impact how much you’re eligible to borrow.

What Is a Home Equity Loan and How Does It Work?

A home equity loan provides funds in one lump sum, paid out all at once when your loan closes.

You repay it on a regular schedule until the balance is paid off. If you have a fixed-rate loan, your interest rate and monthly payment generally stay the same for the life of the loan, making budgeting more predictable.

This financial structure works well for expenses with a known cost. For example, imagine you've received contractor estimates totaling $30,000 for a home renovation. Because you already know the project's cost, receiving one lump-sum payment can provide the funds you need to complete the work without borrowing more than necessary.

A credit union home equity loan can also be used as part of a debt consolidation plan or a major planned purchase.

What Is a HELOC and How Does It Work?

A home equity line of credit, commonly called a HELOC, works differently. Instead of receiving one lump sum, you're approved for a maximum credit limit that you can borrow against as needed during what's known as the draw period.

Think of it like a revolving line of credit that's backed by your home's equity. Rather than taking all the money at once, you decide when and how much to borrow, up to your approved limit. This flexibility can make a HELOC appealing for projects or expenses where the total cost isn't fully known at the beginning.

For example, suppose you're completing home improvements over several months. You might pay a contractor for the first phase today, purchase materials later, and cover landscaping costs several months after that. With a HELOC, you can access funds as those expenses arise instead of borrowing the full amount upfront.

Unlike many home equity loans, HELOCs often have variable interest rates, which means your payment could change if interest rates rise or fall over time.

Depending on the HELOC's terms, draw period payments may cover interest only, or interest plus a portion of the principal. When the repayment period begins, required payments may increase because you begin repaying principal as well. Review the draw period, repayment period, rate-adjustment terms, fees, and payment examples before opening a line of credit.

Home Equity Loan vs. HELOC: Real-World Examples

There's no one-size-fits-all answer when comparing a HELOC vs. a home equity loan. But taking a look at a few of the most common scenarios might help you make a more informed decision:

Adding a Sunroom to Your Home With a Defined Budget

Suppose you've received contractor estimates to add a new sunroom to your home and know that it will cost about $40,000. Because the total expense is clear before work begins, a fixed-rate home equity loan may provide the predictability you're looking for, allowing you to pay for the renovation all at once. You'll receive the funds in one payment and repay the loan on a set schedule.

Multiple Projects and Phased Home Renovations

Perhaps you want to replace some leaky windows this year, remodel a bathroom next year, and update your landscaping after that. When costs are spread across multiple phases, a HELOC can offer flexibility by allowing you to borrow funds as expenses arise.

Debt Consolidation

Keeping track of multiple debt payments can be challenging. A home equity loan allows you to consolidate eligible debts into one loan, potentially replacing higher-interest balances with a single, more manageable monthly payment. This is generally well-suited if you know exactly how much you need to borrow.

Educational Expenses

Paying for college isn’t always a one-time expense. Since tuition, textbooks, fees, and other educational costs are often spread across multiple semesters, a revolving line of credit allows you to draw funds as expenses arise.

Ongoing Home Maintenance

Replacing an aging furnace, repairing a deck, or updating plumbing can happen over several years. A HELOC may provide ongoing access to funds when needs arise.

Is Borrowing Against Your Home the Right Financial Move?

Before borrowing against your home's equity, take a step back and think through how it fits into your overall financial picture:

• Do you know how much money you need in total?

• Are you more comfortable with a defined payment or is flexibility more important?

• Do you have a strategy for repayment?

• Does borrowing fit your long-term financial goals?

Remember that home equity products use your home as collateral. Missing payments could put your home at risk. That’s why it’s important to borrow responsibly and understand the terms fully before you sign a loan agreement.

Frequently Asked Questions

Can I have both a HELOC and a home equity loan?

In some cases, yes. It depends on your available equity and a lender's guidelines, so it's worth discussing your specific situation with a lender directly.

How much equity can I usually borrow?

A lender can help you determine how much you qualify for. Typically, they’ll take a look at the current value of your home, your mortgage balance, your credit history, income, and other qualification requirements.

What happens if I sell my house before paying off the loan?

If you sell your home, you’ll typically need to pay off the remaining balance on the loan from the proceeds of the sale before ownership can be transferred to the buyer.

Can I pay off a HELOC or home equity loan early?

Many home equity loans and HELOCs can be repaid early, but some agreements include prepayment penalties, early-closure fees, or reimbursement of closing costs if the account is closed within a specified period. Review your loan agreement or ask your lender about any prepayment terms before borrowing.

Will applying for a HELOC or home equity loan affect my credit score?

Like many types of financing, applying for home equity financing in Indiana may result in a hard credit inquiry, which can temporarily affect your credit score. Once you’ve actually borrowed funds, your ongoing payment history on the account can also influence your credit over time.

The Guidance You Need to Make the Right Choice

Both a HELOC and a home equity loan let you borrow against the equity you've built in your home. The better fit depends on how you plan to use the funds, how you prefer to budget, and how comfortable you are with a payment that could shift over time.

At Industrial Federal Credit Union, we believe financial decisions are easier when you have clear information and guidance you can trust. As a member-owned financial cooperative, we're committed to helping Indiana homeowners explore their options with confidence. It's one reason Forbes recognized IFCU as Indiana's #1 Credit Union.

If you're comparing a HELOC and a home equity loan, our lending team is here to answer your questions and help you explore solutions that fit your goals. Connect with an IFCU lending specialist to learn more today.

All member deposits are insured up to $250,000 by the NCUA. Industrial Federal Credit Union is proud to serve Indiana communities and was recognized as the #1 Credit Union in Indiana by Forbes.