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What is a Home Equity Loan (HELOAN) and How Does it Work

A HELOAN is a way to use your home equity as collateral, but instead of getting a line of credit, you'll receive one lump sum that's repaid over time with a fixed interest rate. Similar to a home equity line of credit (HELOC), but with a HELOC, you have a line of credit you can draw from and pay back, usually with a variable interest rate.

How Does a HELOAN Work

Like any other time you want to borrow money from a bank there are a few things to know before starting the application process. It's a good idea to do some math before getting started to make sure the payment is affordable before applying.

  1. Qualification
    If you want a HELOAN, the first thing to do is make sure you have enough equity in your home to qualify. You'll also need to have a good credit score and a stable income. Although qualifications are different per bank, you'll find some good information in our article How to Qualify for a HELOC.
  2. Loan Amount
    Your maximum loan amount is based on the amount of equity in your home. Banks all have slightly different qualifications, but in general, you could borrow up to 85% of your home's appraised value minus the amount of money you owe on your mortgage.
  3. Fixed Interest Rate
    HELOANs usually come with a fixed interest rate, which means your interest rate won't change while you're paying back what you borrowed. This way, you'll always know what your monthly payment will be.
  4. Lump Sum Disbursement
    After you're approved, you'll get one lump sum of money deposited into your account which you can use for just about anything, like home improvements, debt consolidation, education expenses, and more.
  5. Repayment
    You'll have regular monthly payments to make each month over a set amount of time, ranging from somewhere between 5 and 20 years.
  6. Collateral
    Just like a HELOC, a HELOAN is a secured loan, which means that if you don't pay back what you owe, the lender can foreclose on the property to repay the outstanding debt.
  7. Tax Deductibility
    In some cases, the interest you pay can be tax-deductible, but this can change and depends on the tax laws of your specific state. Always check with a tax professional to understand current tax implications.

HELOC vs HELOAN: What's the Difference

There are key differences between a HELOC and a HELOAN:

Detail HELOAN
Uses your home's equity as collateralYes
Has closing costsYes
Potential tax deductions availableYes (check with a tax advisor)
How you can use itFor just about anything
Interest rate typeFixed
Monthly PaymentSet
Amount borrowedReceive a lump sum for the total amount you applied for
Loan changesNone
Detail HELOC
Uses your home's equity as collateralYes
Has closing costsYes
Potential tax deductions availableYes (check with a tax advisor)
How you can use itFor just about anything
Interest rate typeVariable
Monthly PaymentChanges, payments are interest only during the draw period
Amount borrowedAccess to a line of credit for the total amount you applied for (only pay back what you actually borrow)
Loan changesAfter the draw period, your HELOC will change to an amortized loan with principal and interest, called the repayment period (15 years at WaFd Bank)
Detail HELOAN HELOC
Uses your home's equity as collateralYesYes
Has closing costsYesYes
Potential tax deductions availableYes (check with a tax advisor)Yes (check with a tax advisor)
How you can use itFor just about anythingFor just about anything
Interest rate typeFixedVariable
Monthly PaymentSetChanges, payments are interest only during the draw period
Amount borrowedReceive a lump sum for the total amount you applied forAccess to a line of credit for the total amount you applied for (only pay back what you actually borrow)
Loan changesNoneAfter the draw period, your HELOC will change to an amortized loan with principal and interest, called the repayment period (15 years at WaFd Bank)

Understand the Risks

It's essential to go over your finances, look at how much you need to borrow, and review all your options before applying for a HELOAN. While this can be a good option for many people, it isn't the only option, and it does come with risk. You'll receive a lower interest rate compared to credit cards and other types of loans, it also involves using your home as collateral, which means you could lose your home if you can't make the payments. Always compare options and look at how those options compare between different lenders. If you're looking for some help, contact a financial advisor to make sure it aligns with your budget and overall goals.

WaFd Bank is Here to Help

Our friendly loan officers are here to help you do the math so you can make the right decision for you and your family. WaFd also offers tools and services to help you manage your money and reach your financial goals, like Free Checking* and a highly-rated mobile app. Join us and find out for yourself why WaFd Bank is a Best Bank!

All loans subject to credit approval.

*Nonsufficient funds charge may apply.

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