A Home Equity Line of Credit (HELOC) offers homeowners a way to extract a line of credit using their home’s equity as collateral. It is a kind of secondary mortgage secured against your home, subsequent to the primary mortgage. Debating between a HELOC and a home equity loan? A home equity loan also allows homeowners to borrow a fixed amount of money against their home’s equity. Both are essentially borrowing against your home, but they have significant differences and associated advantages and disadvantages. In this content, we will discuss a home equity loan in relation to a HELOC, their pros and cons, and much more to help determine which is the better option for you.
HOME EQUITY LINE OF CREDIT (HELOC)
ADVANTAGES:
HELOCs operate similarly to credit cards – you can borrow, repay, and re-borrow, offering flexibility for continuous costs or projects.
HELOCs typically involve lesser initial costs than home equity loans, making them more economical to initiate.
Variable Interest Rates can be beneficial if interest rates fall, reducing your borrowing costs.
With a HELOC, you can withdraw money as and when required, up to a set credit limit.
Quite often, the interest on a HELOC may be tax-deductible, dependent on how the funds are utilized and the prevailing tax laws.
DISADVANTAGES:
The fluctuating interest rates, while advantageous in some instances, can lead to higher interest charges if they rise.
The revolving nature of HELOCs can lure borrowers into accruing more debt than they can efficiently manage.
Failure to repay may result in losing your home.
HOME EQUITY LOAN
ADVANTAGES:
Fixed interest rates ensure consistent monthly payments.
You receive money as a lump sum which can be advantageous for specific expenditures or debt consolidation.
Home equity loans have a structured repayment program, making it easier to budget and plan for repayments.
RELATED: How to Accelerate the Development of Equity in Your Home
DISADVANTAGES:
Escalating interest rates can lead to higher payments.
Failing to pay back may result in losing your home.
HOW TO SECURE A HELOC AND A HOME EQUITY LOAN
Next, we will guide you through the process of acquiring a home equity loan and arranging a line of credit, from application procedures, credit prerequisites, closing costs to appraisal requirements.
1. ASSESS YOUR FINANCIAL STANDING
Estimate the current market value of your home and calculate your equity. Equity is the difference between your home’s value and the remaining mortgage balance.
Evaluate your financial necessities and objectives to determine the lending amount.
RELATED: 5 Tactics to Amplify Your Home’s Value
2. COMPARE LENDERS
Contrast various lenders, such as banks, credit unions, or online lenders. Search for competitive interest rates and terms.
Consider taking advice from friends, family, or financial advisors.
3. APPLICATION PROCEDURE
Understand Your Equity: Home equity refers to the part of your home that is yours outright.
Credit score: This three-digit number conveys your history of debt management. Your credit score can vary from 300 to 850.
Debt-to-Income Ratio (DTI): Your lender will scrutinize your DTI, i.e., your fixed monthly debt divided by your gross monthly income expressed as a percentage.
4. UNDERGO A PROPERTY APPRAISAL
The lender may insist on an appraisal to establish the current market value of your property.
5. CREDIT REQUIREMENTS
Review your credit report to ensure its accuracy and comprehend your creditworthiness. A strong credit score will allow you to negotiate better terms.
Aim for a credit score of 620 or more with a home equity loan.
RELATED: Proven Ways to Elevate Your Credit Score by Over 100 Points
6. UNDERTAKE CLOSING COSTS
Closing costs cover application fees, title search, attorney fees, among other charges.
Closing costs hinge on your location and the specific type of the loan. Consult your lender for detailed closing cost information.
RELATED: Understanding and Estimating Your Closing Costs
7. RECEIVE LOAN CONDITIONS AND CONCLUDE
Upon approval, the lender will provide you with the loan conditions, including interest rate, loan sum, and repayment plan.
Examine these loan terms carefully, including interest rates, repayment schedules, and any associated charges.
After agreeing with the terms, you can approve the offer by signing the loan agreement.
The lender will finalize the closing, which might necessitate signing legal documents and disbursing any closing costs or fees.
IN SUMMARY
Ultimately, the preference between a HELOC and a home equity loan is dependent on your fiscal objectives and personal predilections. A home equity loan delivers a lump sum upfront that you repay in fixed installments with a constant interest rate. A HELOC allows you to access equity as required up to a certain limit.
Bear in mind, utilizing your home as collateral carries risks, as non-payment could culminate in a loss of your home due to foreclosure.
