Home Equity Acronyms: Making Sense Of HEL, HELOC & HEA

Key takeaways

• A home equity loan (HEL) and home equity line of credit (HELOC) are types of loans that use your home equity as collateral.
• With a HEL, you get a lump sum. With a HELOC, you get access to an open line of credit over a set period of time.
• Unlike HELs and HELOCs, home equity agreements are examples of equity financing. Instead of taking out credit, you get cash today in exchange for a share of the proceeds when you sell your home at a later date. There are no monthly debt payments.

Are you looking to get cash for your home equity but have no idea where to start, or what all those financial terms mean? You’re not alone. Many homeowners find the myriad (and similar-looking) home equity acronyms – HEL, HELOC, HEA – confusing.

No need to worry, though. Our short, no-nonsense guide can help you make sense of the industry lingo.

First things first: what is an equity loan?

Equity loans come in many shapes and forms: HELs, HELOCs and more.

We’ll explain what these acronyms mean in a minute. For now, you should know that there’s one thing they have in common: They allow you to borrow money against the equity in your home.

Your home equity is what your home is worth on the market minus what you currently owe on the property, such as any pending loans or mortgages.

Equity loans vs. mortgages

Because equity loans use your home as collateral, people used to call them second mortgages. Not only is this term outdated, it’s also a bit misleading. A mortgage enables you to buy a property you don’t own. In contrast, you can only get an equity loan once you have accumulated some equity in your property.

Who Qualifies For an Equity Loan?

Here comes a few more acronyms…

The eligibility criteria – including credit score, loan-to-value (LTV) ratio and debt-to-income (DTI) ratio requirements – vary depending on the provider and the equity loan type. In any case, you will need to have equity in your home.

Explaining 3 common home equity acronyms

Let’s break down three acronyms that come up each time you look up home equity online.

What Is a home equity loan (HEL)?

With a home equity loan, you borrow a lump sum against the equity in your home. Most lenders will usually allow you to borrow up to 75–85% of your equity.

You then have to repay that sum in monthly installments over a period that can range from 5 to 30 years. HELs are fixed-rate loans, so the interest rate won’t change.

HEL eligibility requirements

To take out a HEL, you typically need:

• Credit score of 620 or higher
• Maximum loan-to-value ratio of 85%
• Maximum debt-to-income (DTI) ratio of 43%

Is a HEL right for you?

A home equity loan can be a good choice if you need a large lump sum right now to cover high or unexpected short-term expenses, such as medical bills or a home renovation. You can also use a HEL to consolidate your existing debt with a lower interest rate.

Keep in mind that HELs usually have higher interest rates than HELOCs. You should also expect to pay a closing, or signing, fee that will amount to 3–5% of the loan amount. Finally, don’t forget that defaulting on a HEL could result in foreclosure of your property.

What is a home equity line of credit (HELOC)?

Think of a HELOC as a credit card. You can use it to borrow money on an ongoing basis – in some cases, up to 10 years – with your home equity as collateral.

Unlike HELs, most HELOCs are adjustable-rate loans, so expect the interest rates and monthly payments to change (and potentially go up) over time.

HELOC eligibility requirements

Lenders will usually require:

• Credit score of 620 or higher
• Maximum LTV ratio of 85%
• Maximum DTI ratio of 43%

Is a HELOC right for you?

Because a HELOC loan gives you access to an open line of credit, it can be a good fit if you don’t know how much you’ll need or when. HELOCs also tend to have lower signing costs than HELs, if any.

On the other side, the lender may revoke or lower your credit line if your financial situation takes a turn for the worse or if your property value decreases. You also run the risk of foreclosure if you default.

HELOCs typically have variable interest rates, annual fees, minimal draw requirements, and may have early closure or pre-payment penalty fees.

What is a home equity agreement (HEA)?

As we mentioned earlier, home equity agreements provide an alternative option for pulling equity out of your home. With an HEA, you receive a lump sum of cash today in exchange for a portion of your home’s future value. That means there are no monthly debt or interest payments.

You settle your HEA when you sell your home or when the HEA ends, typically after 10 years.

HEA eligibility requirements

Eligibility requirements vary between providers, but with Unlock, you may qualify for an HEA with:

• Credit score of 500 or higher
• Maximum LTV ratio of 80%

Is a HEA right for you?

A home equity agreement can be a great solution if you need cash as soon as possible but don’t qualify for other financial products. You can also look into an HEA if you can’t afford, or don’t want to, pay monthly debt or interest payments.

With an HEA, bear in mind that if you want to continue owning your home after the end of the term, you’d need to buy your HEA provider out. You will also need to have accumulated enough equity in your home – at least 25% in most cases – to qualify for a HEA.

HEL, HELOC or HEA: Which one is better?

Now that you know what these common home equity acronyms mean, here’s a short recap of their respective pros and cons.

HEL Pros:

• Lump sum right off the bat
• Ability to borrow up to 75–85% of your home equity
• Fixed interest rates and predictable monthly payments
• Good for covering big short-term expenses such as medical bills or home renovations
• Ability to use it to consolidate your debt with a lower interest rate

HEL Cons:

• Higher interest rates than HELOCs
• 3–5% signing fee

HELOC Pros:

• Access to an open line of credit over time
• Interest rates that are typically lower than HEL rates
• Lower closing costs than those associated with a HEL
• Good fit if you don’t know how much you’ll need or when

HELOC Cons

• Adjustable interest rates, meaning monthly payments may go up
• Possibility of lender revoking or lowering your credit line if your financial situation worsens or your home value decreases
• Foreclosure potential if you default on payments
• Annual fees
• Minimal draw requirements
• Possibility of early closure or pre-payment penalty fees

HEA Pros:

• Lump sum of cash without borrowing
• No monthly payments
• No income requirements
• Good fit if you have less than perfect credit
• Good for covering large short-term expenses
• Ability to use to eliminate existing debt

HEA Cons:

• Need to buy the HEA provider out if you want to keep your home after the end of the term
• Need enough equity (usually 25%) in your home

The terminology surrounding home equity products can be confusing, making it difficult to distinguish all the choices. We’re hoping this guide helped provided the clarity needed to determine which option might work best for you.