A Home Equity Line of Credit (HELOC) allows homeowners to utilize their built-up home equity as security to access a line of credit. Functioning as a type of secondary mortgage, the primary mortgage acts as the initial lien on the property. Have you ever had to choose between a HELOC and a Home Equity Loan?
A Home Equity Loan also enables homeowners to loan a pre-determined sum of money using their home equity as collateral. Both financing models leverage your home as security, but each has significant variations, with respective advantages and disadvantages.
So, let’s compare a HELOC and a Home Equity Loan, focusing on their pros and cons to guide you on the most suitable choice.
HOME EQUITY LINE OF CREDIT (HELOC)
Advantages:
HELOCs operate like a continuous credit line, comparable to a credit card. It allows the flexibility of borrowing, repayment, and re-borrowing – useful for continuous expenses or projects.
Compared to home equity loans, HELOCs often have fewer initial costs, making them economically feasible.
Varying interest rates can lower your borrowing costs if rates diminish.
You can withdraw funds as required over a longer duration, up to a pre-set credit limit.
In many scenarios, HELOC interest may be tax-deductible according to your fund utilization and prevailing tax laws.
Disadvantages:
Varying interest rates can surge borrowing costs if rates increase.
HELOCs can encourage borrowers to accumulate more debt than they can manage.
Non-repayment can put your home at risk.
HOME EQUITY LOAN
Advantages:
Fixed interest rates offer predictability for monthly repayments.
A one-time lump sum is granted, beneficial for distinct expenses or debt consolidation.
Home Equity Loans have a well-defined repayment schedule, simplifying budget and repayment planning.
Disadvantages:
An increase in interest rates can elevate your repayments.
Non-repayment can put your home at risk.
PROCEDURE TO ACQUIRE A HELOC AND A HOME EQUITY LOAN
Here’s a step-by-step guide to securing a home equity loan or a HELOC:
1. ASSESS YOUR FINANCES: Determine your home’s current market value and calculate your equity, i.e., the difference between your home’s value and your remaining mortgage balance. Estimating your financial needs and objectives helps to determine your borrowing amount.
2. RESEARCH LENDERS: Compare different lenders, considering those with competitive interest rates and terms. Recommendations from friends, family, or financial advisors can be valuable.
3. APPLICATION: Understand your home equity, credit score, and Debt-to-Income (DTI) ratio – the percentage of your fixed monthly debt divided by your gross monthly income.
4. PROPERTY APPRAISAL: The lender may request an appraisal to discern your home’s current market value.
5. CREDIT CHECK: Get your credit report to ascertain its accuracy and your creditworthiness. A positive credit score guarantees favorable terms. Aim for a credit score of 620 or more for a home equity loan.
6. CLOSING COSTS: Closing costs include application fee, title search, attorney fees, etc. The amount depends on your location and loan type. Consult your lender for precise information.
7. LOAN TERMS AND CLOSING: Upon approval, the lender will disclose loan terms, including interest rates, loan amount, and repayment schedule for review. If they are agreeable, you can endorse the loan agreement.
To conclude, choosing between a HELOC and a home equity loan depends on your financial goals and preferences. Being aware that your home is at stake should you fail to make repayments can guide your decision.
