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Home equity loans and home equity lines of credit (HELOCs) are two ways to tap into your home equity, but there are important differences between the two. Can getting both types of loans give you the best of both worlds? Depending on your circumstances, you may be able to have a home equity loan and a HELOC at the same time.
Home Equity Loan vs. HELOC
Both home equity loans and HELOCs are secured by your home. Here's how they work:
Home Equity Loan
A home equity loan is a type of installment loan. You receive a single, lump-sum payment that you pay back in regular monthly installments. Home equity loans typically have fixed interest rates that are generally lower than HELOC rates. Loan terms for home equity loans usually range from five to 30 years.
Home Equity Line of Credit (HELOC)
A home equity line of credit is a form of revolving credit, similar to a credit card. You can borrow as needed, up to your credit limit, during the "draw period" (usually 10 years) and pay back only what you borrow. During the draw period, you may have the option to repay just the interest. Once the draw period ends, you generally have 20 years to pay off the principal plus interest. Although you can find some fixed-rate HELOCs, most have variable interest rates.
| Home Equity Loan vs. HELOC | |
|---|---|
| Home Equity Loan | HELOC |
| Fixed monthly payment | Payment varies based on usage |
| Fixed interest rate | Variable interest rate |
| Receive one lump sum | Borrow as needed throughout draw period |
| Installment credit | Revolving credit |
| Home is at risk if payments aren't made | Home is at risk if payments aren't made |
Can You Have a Home Equity Loan and a HELOC on the Same House?
It's possible to have a home equity loan and a HELOC on the same house if you have sufficient equity in the home, have enough income to afford the payments and meet the lender's other criteria. You'll generally need 15% to 20% equity in your home to qualify for either type of loan.
Whether or not you still have a mortgage on your home impacts how much equity borrowing you can do. That's because lenders consider your combined loan-to-value ratio (CLTV) when determining your HELOC and home equity loan limits. Your CLTV takes your primary mortgage and any other loans secured by your home into account. Typically, you can borrow up to 85% of your CLTV, but some lenders let you borrow more.
To figure out your CLTV, add the outstanding balance of your primary mortgage to the amount of HELOC and home equity loan you want, then divide the total by your home's current value.
Example: Suppose your home is valued at $500,000. You owe $300,000 on your mortgage and want to apply for a $75,000 home equity loan and a $75,000 HELOC. The loan amounts add up to $450,000; divided by $500,000, that's 0.9, or a CLTV ratio of 90%. Unless you can find a lender willing to offer 90% of your CLTV, you'll need to downsize your desired loans.
Typically, loans with higher CLTVs have stricter requirements for income, debt-to-income ratio and credit scores. They may also have higher interest rates.
Factors Impacting Your Ability to Have a Home Equity Loan and a HELOC
Whether you apply for a home equity loan or HELOC, lenders will evaluate similar factors, including:
- Property value: Lenders may require you to get a home appraisal to confirm your home's value. They want to be sure they aren't going to be lending you more money than your home is worth in case you default.
- Credit score: Typically, you'll need a credit score of 680 or better to get a home equity loan or HELOC.
- Payment history: Lenders will review your credit report, looking for a solid history of on-time payments.
- Income: You'll need a steady income that's enough to cover the loan payments. Lenders generally ask for pay stubs, W-2 forms or recent tax returns as evidence of your income.
- Debt-to-income ratio (DTI): Your DTI is the percentage of your gross monthly income that goes toward debts, including your current mortgage, any credit card minimum payments and any other loans (such as a car loan) you are currently paying. If too much of your income is dedicated to repaying debt, lenders may doubt your ability to keep up with your loan payments. You generally need a DTI of 43% or less to qualify for a home equity loan or HELOC.
- Combined loan-to-value ratio: Lenders will calculate your CLTV to determine how much you're eligible to borrow.
Pros and Cons of Having a Home Equity Loan and a HELOC
Before applying for a home equity loan and a HELOC, give serious thought to the pros and cons of using both types of loans at once.
Pros
- HELOCs and home equity loans typically have lower interest rates than unsecured loans (like personal loans) or credit cards.
- Interest paid on both loans may be tax deductible if you use the funds for major home improvements or renovations.
- Combining the flexibility of a HELOC with the predictable monthly payments of a home equity loan can provide greater versatility than just one type of loan offers.
- Depending on your home value and amount of equity, HELOCs and home equity loans may have much higher borrowing limits than a personal loan or credit card.
- Making timely payments on multiple loans could help improve your credit score.
Cons
- Borrowing against your home reduces your home equity.
- Your home is at risk if you default on either loan.
- Variable HELOC interest rates could lead to higher payments you may struggle to afford.
- Lenders can reduce or freeze your HELOC if your income or home value declines.
- Increasing your debt load with two loans could make it harder to meet other financial obligations.
- Both HELOCs and home equity loans can have closing costs ranging from 2% to 5% of the loan amount or credit line. With two loans, these costs can add up.
- If home values in your area drop, you could end up underwater—that is, owing more money on your loans than the house is worth.
The Bottom Line
Before taking on both a HELOC and a home equity loan, carefully consider whether your budget can handle the additional debt, and weigh the risks of using your home as collateral. An introductory 0% APR credit card is another way to finance large expenses; if you pay off the balance before the promotional period ends, you can avoid accruing interest. Personal loans are another option; though they usually charge higher interest rates than home equity loans or HELOCs, they won't put your home on the line. If time allows, building up savings or earning extra money could help you cover major expenses without adding to your debt.
No matter what type of loan or credit you seek, a good credit score can make it easier to access. Check your credit report and credit score for free with Experian before applying for credit. Taking action to improve your credit score could help you qualify for lower interest rates and better loan terms.