HELOC vs. Mortgage
Quick insights
- A mortgage helps you buy a home, while a home equity line of credit (HELOC) lets you borrow money using equity in a home you already own.
- Mortgages typically have fixed or adjustable monthly payments over a repayment period. HELOCs have two key time periods: when you can borrow money and when you repay it.
- You’d likely use a mortgage loan to finance a home purchase and a HELOC to get ongoing access to money for expenses.
A mortgage and a home equity line of credit (HELOC) are very common terms in real estate. However, they serve very different purposes. Understanding the definitions, purposes, ins and outs can help you make a more confident financial decision. In this article, we will explain how mortgages and HELOCs work, compare their key differences and help you determine which option may be the better fit for your financial goals.
What is a mortgage?
A mortgage is a home loan used to purchase a property. This money the lender provides to purchase the home upfront is the loan you repay. You typically do this over time through scheduled monthly payments that include principal and interest. Depending on the loan type, your interest rate and monthly payment may remain the same or change over time. There are various home loans available to borrowers such as FHA loans, VA loans, conventional loans and jumbo loans.
Many monthly mortgage payments can include amounts for property taxes and homeowner’s insurance. These portions go into an escrow account for your lender to pay on your behalf when those expenses are due.
Common features of a mortgage:
- Used to purchase a home or refinance an existing mortgage.
- Repaid in monthly installments over a set loan term.
- Common loan terms include 15 or 30 years.
- Monthly payment may cover various things, typically the principal, interest, property taxes and homeowner’s insurance.
- Available with fixed or adjustable interest rates, often with lower interest rates than unsecured borrowing because the home serves as collateral.
- Usually requires a down payment when buying a home, but some loan programs offer lower or no down payment options.
- Qualification is based on personal and lender-specific factors, such as credit score, income, savings, debt-to-income ratio and more.
What is a HELOC?
A home equity line of credit (HELOC) is a revolving line of credit secured by the equity in your home. You can borrow money as needed up to your approved credit limit during the draw period, which is often 3 to 10 years. The repayment period follows and may last 10 to 20 years. The lengths of these periods vary by lender, product and state. Lenders have different requirements and terms for qualification, borrowing and repayment.
Common features of a HELOC:
- Functions as a revolving line of credit rather than a one-time loan.
- Lets you borrow against your available home equity.
- Flexible access to money (your available credit).
- Credit limit is based on current equity, financial profile and lender policies.
- Interest is usually charged only on the amount you borrow, not your full credit limit.
- Many HELOCs have a variable rate, so payments can change. Some lenders may offer features that let you lock a rate on some or all of your balance; availability varies.
- Commonly used for home improvement projects, debt consolidation, education or other major expenses.
Because a HELOC is secured by your home, failing to repay could put the home at risk. Depending on your agreement and applicable law, the lender may be able to reduce, suspend or terminate the line in certain circumstances.
HELOC vs. Mortgage: Key differences
Primary purpose
- Mortgage: Purchase or refinance a home
- HELOC: Borrow against equity in a home you already own
Loan structure
- Mortgage: One-time lump-sum loan
- HELOC: Revolving line of credit that you borrow from as needed
Collateral
- Mortgage: The home being financed
- HELOC: Your existing home
How money is disbursed
- Mortgage: Full loan amount at closing
- HELOC: You withdraw funds during the draw period as needed
Interest rate
- Mortgage: Fixed rate or adjustable rate
- HELOC: Usually variable, though some mortgage lenders offer fixed-rate options (Chase HELOCs are variable rate)
Monthly payments
- Mortgage: Regular principal and interest payments
- HELOC: Payments based on balance and lender’s terms
Repayment timeline
Qualification
- Mortgage: Typically based on credit, income, DTI ratio and ability to make a down payment (depending on the loan program)
- HELOC: Typically requires sufficient home equity, along with qualifying credit, income and DTI ratio
Good for
- Mortgage: Buying a home or replacing an existing mortgage (refinancing)
- HELOC: Funding home renovation projects or other ongoing or large expenses while keeping your existing mortgage
Additional loan types
If a mortgage or HELOC doesn’t seem like the right fit, you can explore other financial options. Here are some examples that could meet your needs and goals:
- Home equity loan: With a home equity loan, you borrow a lump sum against your home equity with fixed monthly payments and a fixed repayment schedule.
- Cash-out refinance: A cash-out refinance replaces your current mortgage with a larger one, and you receive the difference in cash.
- Personal loan: An unsecured loan that doesn’t require home equity and is often used for smaller projects or expenses.
- Home equity investment: Receive funds in exchange for sharing a portion of your home’s future appreciation instead of taking out a traditional loan.
- Construction loan: Short-term financing designed to help pay for building a new home or completing major renovations.
Not all options are available from every lender. Availability varies by lender, state and your qualifications. Chase does not offer home equity loans, home equity investments or construction loans at this time.
In summary
A mortgage and a HELOC both use real estate as collateral, but they serve different purposes. A mortgage is designed to help you purchase or refinance a home, while a HELOC provides access to the equity you’ve already built in your home. Understanding how each option works, including repayment structure, qualification requirements and intended use, can help you choose the financing solution that best fits your goals.
If you have questions along the way, connect with a Home Lending Advisor today.
