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Homes On The Block

A Guide to Home Equity Loans and Home Equity Lines of Credit

What are the pros and cons of a Home Equity Loan versus a HELOC? Learn more below.

Are you thinking about obtaining either a home equity loan or a home equity line of credit (HELOC) to purchase something you need or want? If so, you may be wondering which loan you should go with. Is one better than the other?

Both types of loans can be used for many purposes. Just a few include:

  • Home renovation projects
  • Emergencies
  • Debt consolidation
  • Starting a business
  • College expenses
  • Funding a vacation
  • Paying medical bills
  • Buying a vehicle

While home equity loans and HELOCs do have similarities, there are some important differences you should be aware of. It’s important to understand how each loan works so you can select the best option for your needs.

What is a Home Equity Loan?

With a home equity loan, the equity in your home is used as collateral.

For example, if you have accumulated $50,000 worth of equity in your home from your down payment, monthly mortgage payments, and asset appreciation, you may qualify for a home equity loan of up to $50,000.

Benefits of Home Equity Loans

With a home equity loan, you will receive a lump-sum payment for the amount of the loan. This is an important consideration if you need to make a major purchase, deal with an emergency, or do something else that requires you to have the money up-front.

Home equity loans usually have fixed interest rates that may be lower than what credit cards and other unsecured loans offer. Because you will know in advance what your monthly payments will be, this can help you with budgeting.

Another benefit to consider is that the interest on these loans is tax-deductible. The IRS rules on home equity loan tax deductions change frequently, so be sure to consult with a tax professional if you have any questions before applying.

Cons of Home Equity Loans

If you are still making payments on your home, you will end up with two monthly payments – your mortgage and your home equity loan. This is why home equity loans are sometimes referred to as second mortgages.

Another negative to consider is if you default on a home equity loan. Because you are using your home as collateral, if something happens and you have to stop making payments on your loan, you could lose your home.

With a home equity loan, you will also have a reduction in home equity. If you decide to sell your home, you will have to use the proceeds to pay off both your mortgage and your home equity loan.

What is a Home Equity Line of Credit?

A home equity line of credit (HELOC) is very similar to a home equity loan. Your home is used as collateral with both types of loans.

The primary difference between the two loans is in how you receive the funds. With a home equity loan, you receive the money in a lump sum payment. With a HELOC, however, you are given a line of credit that operates similar to a credit card. You can borrow money as you need it over the life of the loan, and as you repay it, the amount of available credit is replenished.

Benefits of HELOCs

The primary benefit of HELOCs is that they are highly flexible. You can use the available money when you need it instead of receiving a lump sum payment and having to immediately begin making monthly payments. Similar to home equity loans, HELOCs also often have interest rates that are lower than credit cards and other unsecured loans.

Because a HELOC is a line of credit instead of a loan, you never have to draw from it if you don’t want or need to. Because of their flexibility, some people take out HELOCs as a form of protection in case something happens, like an unexpected home repair or a medical expense.

Cons of HELOCs

An important negative of HELOCs to consider is that they usually have variable interest rates. This may make budgeting difficult if interest rates rise sometime in the future.

With a HELOC, the amount of the credit line you are given could be reduced if your credit score decreases or the value of your home declines. This could disrupt your plans for using the line of credit or cause other problems.

Another negative of HELOCs to consider is that you may be allowed to make interest-only payments on the money you borrow while the loan is active. After that, however, you will be required to repay both the principal and interest. Depending on the terms of the loan, a balloon payment may be required.

Which Loan Should You Choose?

Whether you choose a home equity loan or a HELOC mostly depends on how you will be using the money.

If you need a lump-sum payment upfront to pay an unexpected medical bill, for example, a home equity loan may be the better option. This will allow you to receive all of the money you need at once and then repay it over time with fixed monthly payments.

If you need a line of credit that you can periodically draw from, like with a home renovation project that you are completing yourself, a HELOC may be the better choice. With this option, you can obtain money to purchase materials, tools, and other supplies as they are needed.

Tap Into Your Home Equity for a Great Rate

Your home is much more than the place you live - it’s a valuable asset. If you have accumulated equity in your home, you may be able to tap into it with either a home equity loan or a HELOC to get a great interest rate.

To learn more about our home equity loans and HELOCs click below:

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  • The Great Giveback Official Rules

    1. Eligibility: No purchase or obligation necessary to participate and win. All participants must be 19 years of age or older at time of contest participation. Employees of Listerhill Credit Union are not eligible to register for the contest.

    2. How To Enter the Contest: All Listerhill members who have consumer loans in good standing, (subject to limitations below) are automatically entered. Anyone who takes out a new loan with Listerhill Credit Union, or refinances a loan from another lender with Listerhill Credit Union (subject to limitations below) will automatically be entered to win. Limit of one entry per loan.

    NO PURCHASE NECESSARY: To enter the contest without a loan, send a self-addressed, stamped envelope to: Listerhill Credit Union, P.O. Box 566, Sheffield, AL 35660, Attn: Great Giveback Contest Entry. Limit one entry per person. Written entries must be received no later than July 3, 2021.

    Listerhill Credit Union will not be responsible for incomplete, lost, late, misdirected or illegible entries or for failure to receive entries. All entries become property of Listerhill Credit Union and none will be returned. Any questions regarding the number of entries submitted shall be determined by Listerhill Credit Union in its sole discretion, and Listerhill Credit Union reserves the right to disqualify any entries by persons determined to be tampering with, violating, or abusing any aspect of the contest.

    3. Contest Entry Requirements: In the event the Credit Union, in its sole discretion, determines that any Entry contains content that does not comply with these Official Rules or does not otherwise comply with regulatory guidelines, Credit Union reserves the right to disqualify the entry.

    4. Determining the Winner: A Credit Union employee will select at random four (4) $500 winners (one per day July 12-15) and one Grand Prize Winner from all entries received on July 16, 2021. You do not have to be present to win.

    5. Prizes: $500 Cash Prize: the Credit Union will award four (4) members with $500 cash each. Grand Prize: The Credit Union will pay up to $25,000 toward your loan with Listerhill Credit Union, or combination of loans. No loan payments will be made to loans with any other lender. No cash equivalent provided, and the total prize amount may be less depending on the outstanding amount of loan balance(s) with Listerhill Credit Union. In no event will the prize awarded exceed the total amount of the winner’s outstanding balance of qualifying loans with Listerhill Credit Union. Federal, state and local taxes are the sole responsibility of the winner. IRS regulations require the Credit Union file a 1099 on behalf of the winner.

    A Credit Union employee will call the prize winners and the prize winners will be called up to five times during regular business hours at number provided on entry form and will leave no messages. Failure to reach winner during these calls may result in disqualification of winner, forfeiture of his or her interest in all prizes, and selection of a substitute winner drawn from the drum. Winner will be required to schedule a time, at least 48 hours in advance, to visit Listerhill Credit Union, located at 4790 2nd Street, Muscle Shoals AL, 35661 in person, during regular business hours within seven (7) days of being notified to claim prizes by providing proof of eligibility for prize won and completing and signing an affidavit of eligibility and a liability and publicity release. Failure of any Winner to timely contact the Credit Union, visit the above Credit Union office in person and sign and return any required affidavit and release, or to claim a prize or comply with any term or condition of these Official Rules, will result in drawing Winner's disqualification and the forfeiture of his or her interest in the prize. Winners may waive their right to receive prizes. Prizes are non-assignable and nontransferable. No substitutions allowed by winner.

    6. To be eligible to win, all loans must be in good standing (not more than 30 days past due at the time of drawing. Eligible loans are limited to auto loans (no indirect dealer loans), personal loans (no loans secured by real property, such as mortgages, 2nd mortgages, and Home Equity Lines of Credit) and recreation loans made to consumer borrowers (not business or commercial loans).

    6. Participation. By participating, entrants agree to be bound by these Official Rules and the decisions of the Contest. Except where prohibited, acceptance of any prize constitutes winner's consent to the publication of his or her name, biographical information and likeness in any media for any commercial or promotional purpose, without limitation the Internet, or further compensation. Prizes not won and claimed by eligible winners in accordance with these Official Rules will not be awarded and will remain the property of the Credit Union.