HELOCs and home equity loans are loans where you use your home as collateral. Both are good options for borrowing money if you’ve paid a significant portion of your mortgage. Some homeowners think that these two are similar, but in reality, they are not the same. Let’s look at how these loans work and the significant differences between the two.
What is a home equity loan?
A home equity loan is a lump sum of cash that is given to you in exchange for your promise to repay the loan with interest over a fixed period of time. A home equity loan permits you to take out a loan by using your home as collateral. Your interest rate and term are fixed when you borrow against your home equity.The interest rate for the loan will depend on your credit score, loan amount, payment history, and income. You can use the cash from the loan for a variety of expenses, like home renovations or paying off credit card debts.
What is a HELOC?
A HELOC, or home equity line of credit, is a revolving line of credit that allows you to borrow money as needed and then pay it back over time, similar to a credit card. With this loan type, you can borrow money from your home equity and pay it back gradually.
HELOC terms have two parts:
The draw period is the time allowed to withdraw money, which can range up to ten years. Once this period ends you are no longer allowed to borrow funds from the HELOC.
The repayment period is the time in which the funds can be repayed and may last 20 years. The overall term of the HELOC is 30 years, in this case.
What are the differences between a home equity loan and a HELOC?
Here are the major differences:
HELOC interest rates are variable
Home equity loan rates are fixed
HELOC monthly payments change over time
Home equity loan payments are the same every month
HELOC funds are disbursed as needed
Home equity loans are paid upfront
HELOC repays interest-only during the draw period while repaying principal and interest afterward
Home equity loan payments begin as soon as the loan is disbursed
The main difference between a home equity loan and a HELOC is that a home equity loan has a fixed interest rate and fixed monthly payments, while a HELOC has a variable interest rate and flexible monthly payments. This makes a home equity loan a safer option if you know you will need to borrow a specific amount of money and want to be sure of the total cost you will pay. However, if you are not sure how much money you will need or want the flexibility to borrow more or less as needed, then a HELOC may be the better option for you.
When is a HELOC better than a home equity loan?
A HELOC is the better choice when:
You want a revolving credit line to get funds from and pay down variable expenses.
You need a credit line available for future expenses but don’t need the cash at the moment.
You are intentional with your spending and don’t buy on impulse.
When is a home equity loan better than a HELOC?
A home equity loan is a better choice when:
You prefer a fixed monthly payment since you live on a fixed income
You know precisely how much you need for an expense
You are going for debt consolidation but choose not to access a new credit line
Home equity loans and HELOCs can both provide cash by leveraging your home's equity. Before you choose between them, think about how much you need, the purpose of your loan, and whether or not you want to borrow more in the future. If you're having trouble deciding, get in touch with one of our loan experts who can help you decide which loan is best for you based on your unique requirements.
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