CLoC versus HELOC: What’s the Difference?

For many, financing helps make the dream of owning a home a reality. A mortgage allows homeowners to pay for their property over time while living in it and establishing equity. 

Financing can also help homeowners keep their properties in the best possible shape. When it comes time to make repairs or upgrade a space’s aesthetics, folks don’t have to foot the bill upfront. They can seek a line of credit, like a CLOC or HELOC, to cover expenses and pay back at a later date. 

But no two financing options are exactly alike, and while CLOCs and HELOCs are solid options for renovators, each benefits the borrower in different ways. Here’s everything you need to know about both. 

What’s a home equity line of credit (HELOC)?

A home equity line of credit (HELOC) is a revolving credit line that homeowners can use for major expenses, ranging from renovations to paying for college to starting a business. These loans leverage the borrower’s home as collateral, meaning that should that person default, the lender can foreclose on (take away) their property. 

HELOCs are based on a homeowner’s equity in their property, which means the home’s value must be greater than what is owed to be eligible for this line of credit. The higher a person’s equity, the bigger a loan they can get. According to Bank of America, HELOC limits are often calculated at up to 85% of the value of the borrower’s home minus the amount the person has left to pay off on their mortgage. Other factors also come into play in the approval process, like a person’s credit history and other debts.

Ultimately—within the parameters determined by the lender—the homeowner determines how much they borrow. Say your bank is willing to loan you $200,000, but you only need $75,000 for your home renovations. You can just take out $75,000. And seeing as the HELOC is a revolving line of credit and not a lump sum loan, as you make payments toward the amount borrowed, the amount available replenishes itself. That is, if you pay off, $25,000 of your loan, then you have $25,000 in play to spend.

But HELOCs don’t replenish forever; they have a draw period, typically up to 10 years. During this period, borrowers can use the funds, making interest-only payments. Once the draw period ends, the borrower must start paying back the loaned funds themselves, often over a 20-year period.

Speaking of interest payments, it’s essential for borrowers to understand their HELOC’s interest structure. Some have fixed interest rates while others have variable. Variable interest rates can fluctuate from one monthly payment to the next.

HELOC pros and cons

HELOCs can be a great option for folks who own a home and need liquid funds for significant expenses. But they aren’t the right pick for every borrower. Here are a few upsides and drawbacks. 

Pros

• Borrowers can spend HELOC funds on whatever they want

• HELOCs have lower rates than other credit or loan options (like a credit card)

• HELOC interest is tax-deductible (conditions apply)

Cons

• Variable HELOC rates can cause uncertainty (and stress) because interest rates fluctuate

• The bank can take the borrower’s home away if they default on payments 

• The temptation to spend a lot can be risky, since these loans have high limits 

• HELOCs show up on a credit report, so they can prevent borrowers from being attractive candidates for other loans

• HELOCs can have high origination (a.k.a. processing) fees of 0.5 to 1 percent of the borrowed amount

What’s a closing line of credit (CLOC)?

A closing line of credit (CLOC)  is a niche lending product from Titus that provides funds to homeowners who are nearly ready to sell their properties and want to make final renovations and repairs. Qualified applicants will generally already be working with a real estate agent—steps away from putting their property on the market. 

CLOCs are short-term lines of credit providing a low-risk lending option for candidates who fit the above profile. CLOCs don’t take a homeowner’s property as collateral and require no upfront payments. Repayment is triggered when the borrower sells their home and the lender gets paid out of escrow. 

Like HELOCs, CLOCs can be for a hefty sum: up to $125,000. And while the primary intention of these funds is to aid homeowners in fixing up their properties for sale, CLOCs are flexible. Borrowers can use them for renovation-related expenditures, too, like renting a place to stay while contractors are working on their property or moving fees.

CLOC pros and cons

CLOCs are an ideal option for a homeowner doing last-minute renovations before sticking that for-sale sign on their front lawn. But thanks to the very specific purpose of these lines of credit, they might be limiting (or simply the wrong option) for other types of borrowers. Here are some of the perks and downsides. 

Pros

• CLOCs do not show up on borrower’s credit scores as long as they are repaid, which is a major perk as the homeowners using this line of credit may be in the process of applying for a new loan (like a mortgage for their next property)

• Borrowers do not need to pay anything until their home sells

• There’s no foreclosure risk, since the borrower’s home isn’t taken as collateral 

• CLOCs have no origination fees paid by the borrower

Cons

• CLOCs can’t be used for everything; they’re intended for home improvement projects that help get a property market-ready

• CLOCs are not right for long-term renovations or extensive remodels as the lender expects payment (out of the home sale) within 180 days of the loan date

Know your options and make better financing choices

Knowledge is power. When you’re well-versed in real estate and financing terms, you’re able to confidently make good decisions about lending options—whether you’re taking out a mortgage or a line of credit for renovations. 

That’s why Titus is dedicated to sharing knowledge about the property sale process, home improvements, and the real estate industry on its blog. Keep learning by checking back or continue your reading right now by brushing up on 35 terms every homeowner should know.