A Home Equity Line of Credit, commonly known as a HELOC, is a credit line that homeowners can avail, using the equity in their homes as security. It functions as a secondary mortgage; with the primary mortgage serving as the first claim on the property. This leads to a larger question: HELOC or home equity loan, which one is better for you?
A Home Equity Loan enables homeowners to borrow a predetermined amount of cash with their home’s equity serving as collateral. Both of these financial instruments allow you to get a loan against your home equity but they have their unique features, benefits, and drawbacks.
Let’s delve into the comparison of home equity loans and a HELOC, discussing the pros and cons, facilitating your decision-making.
HOME EQUITY LINE OF CREDIT (HELOC)
ADVANTAGES:
HELOCs operate like a revolving line of credit, quite similar to a credit card. This structure allows for drawing, repaying, and re-borrowing money, providing flexibility for ongoing expenses.
Compared to home equity loans, HELOCs typically have lower initiation costs, rendering them more affordable.
Variable Interest Rates, while could be a disadvantage, it might lower your borrowing costs if the rates drop.
HELOCs allow drawing funds as needed over a defined period, without surpassing a set credit limit.
In many situations, the interest on a HELOC might be tax-deductible, based on the fund usage and prevailing tax laws.
DRAWBACKS:
Variable interest rates can increase interest costs, if rates go up.
Due to their revolving nature, HELOCs might encourage excessive debt accumulation.
Failure to repay can risk your home ownership.
HOME EQUITY LOAN
ADVANTAGES:
Stable interest rates, which assures predictable monthly payments.
Home equity loans provide a singular lump sum, ideal for individual expenses or debt consolidation.
These loans feature a fixed repayment plan, facilitating budgeting and repayment planning.
CONS:
Higher interest rates could elevate your payments.
Failure to repay can risk your home ownership.
PROCESS TO ACQUIRE A HELOC AND HOME EQUITY LOAN:
Next, let’s examine the procedure to procure these loans. We will cover application, credit criteria, closing costs, and appraisal necessities.
1. REVIEW YOUR FINANCIAL STATUS:
Deduce your home’s present market value and calculate your equity. Equity is the surplus value of your home after deducting the existing mortgage.
Examine your financial expectations and requirements to decide your desired loan amount.
2. LOOK FOR LENDERS:
Compare varying lenders, including banks, credit unions, and online providers. Seek competitive interest rates with suitable terms.
Take recommendations from your acquaintances, relatives, or financial advisors.
3. APPLICATION DISCLOSURES:
Know Your Equity: Your home equity is the portion of your property that you actually own.
Credit Score: Your credit score, spanning from 300 to 850 demonstrates your debt management history.
Debt-to-income Ratio (DTI): Your lender will assess your DTI, a percentage derived by dividing your fixed monthly debt by your gross income.
4. CONDUCT A PROPERTY APPRAISAL:
The lender may conduct an appraisal to gauge your home’s current market price.
5. REVIEW CREDIT PARAMETERS:
Obtain your credit report to validate its correctness and assess your creditworthiness. A good credit score may qualify you for improved terms.
Strive to attain a credit score of 620 or above for a home equity loan.
6. UNDERSTAND CLOSING COSTS:
Closing costs cover your application fee, title search, legal fees, and other charges.
Closing costs depend on your location and specific type of loan. Approach your lender for detailed information about closing expenses.
7. UNDERSTAND LOAN TERMS AND CLOSE THE DEAL:
Once approved, the lender will supply you with the loan stipulations, encompassing the interest rate, loan sum, and repayment plan.
Inspect the loan terms, including the rates of interest, payback schedules, and any related charges.
If the terms are agreeable, you can confirm the offer by signing the loan contract.
The lender will finalize the closing procedure, potentially requiring legal document signing and payment of closing costs or fees.
IN CONCLUSION:
The preference between a HELOC and a home equity loan largely depends on your personal financial aims and preferences. A home equity loan provides a fixed lump sum, repaid through fixed payments at a static interest rate. Conversely, a HELOC permits to draw money as required, up to a certain threshold.
Remember that employing your home as collateral comes with inherent risks, as failure to make payments could lead to home foreclosure.
