A Home Equity Line of Credit, or HELOC, is a type of finance that gives homeowners the ability to access a credit line using the equity from their homes as a form of security. This falls in the category of a second mortgage, the first encumbrance being the primary home loan. Have you ever had to contemplate over choosing between a HELOC and a home equity loan?
A home equity loan, on the other hand, offers homeowners the chance to borrow a set amount of money, once again using the equity from their homes as security. While both the HELOC and home equity loan enable you to borrow money secured by your home, they possess individual characteristics, each with its own benefits and disadvantages.
Let’s scrutinize both the home equity loan and the HELOC, exploring their advantages, drawbacks, and more, helping you choose the one that suits your needs.
HOME EQUITY LINE OF CREDIT (HELOC)
THE POSITIVES:
1. A HELOC functions like a credit card, with you having the freedom to borrow, repay, and borrow again. This grants flexibility for ongoing expenditures or projects.
2. Compared to home equity loans, HELOCs generally require lower initial costs, making them more affordable.
3. Variable interest rates can be beneficial if interest rates decrease, as your borrowing costs may also lessen.
4. A HELOC gives you the leeway to withdraw funds as required over an extended period, up to an established credit limit.
5. In several situations, the interest on a HELOC may be tax-deductible, depending on your usage of the funds and current tax laws.
THE NEGATIVES:
1. While variable interest rates can be advantageous, they can also correlate to increased interest costs if the rates increase.
2. The revolving nature of HELOCs could potentially lead borrowers into accumulating excessive debt.
3. Failure to repay can result in the loss of your home.
HOME EQUITY LOAN
THE POSITIVES:
1. Fixed interest rates mean your monthly repayments are consistent and predictable.
2. You are given a one-time lump sum of money, which can be convenient for particular costs or debt consolidation.
3. Home equity loans come with a structured repayment schedule, helping you plan and budget your repayments.
THE NEGATIVES:
1. Rising interest rates can augment your repayment.
2. Non-repayment can lead to the potential loss of your home.
HOW TO OBTAIN A HELOC AND A HOME EQUITY LOAN
Let’s embark on understanding how to secure a home equity loan and a line of credit, starting from the application process, credit requirements, to the closing costs and appraisal prerequisites.
1. EVALUATE YOUR FINANCIAL SITUATION:
Estimate your home’s market value and compute your equity. Equity is the difference between the value of your home and what you owe on your mortgage. Analyze your financial prerequisites and aims to determine how much you wish to borrow.
2. RESEARCH LENDERS:
Contrast differing lenders, including banks, credit unions, and online lenders, looking for those offering beneficial interest rates and terms. Consider procuring recommendations from friends, family, or financial advisors.
3. APPLICATION PROCESS:
Determine your equity: Home equity refers to the portion of your home that is actually owned by you.
Credit score: This represents how effectively up to now, you have been servicing your debts.
Debt-to-income ratio (DTI): This is a percentage derived from dividing your fixed monthly debt by your gross monthly income.
4. UNDERGO A PROPERTY APPRAISAL:
Your lender might require an appraisal to determine your home’s current market value.
5. CREDIT REQUIREMENTS:
Acquire your credit report to verify its accuracy and comprehend how creditworthy you are.
Aim for a score of 620 or above for a home equity loan.
6. CLOSING COSTS:
This includes application fees, title searches, attorney fees, among others. Ask your lender for precise details about expected closing costs.
7. RECEIVE LOAN TERMS AND CLOSE:
Upon approval, your lending institution will provide you with the loan terms including interest rate, loan amount, and repayment schedule. If these terms are agreeable, you can proceed with finalizing and signing the loan agreement.
CLOSING:
The choice between a HELOC and home equity loan is individual, depending on your financial aspirations and personal preferences. A home equity loan provides you with an upfront lump sum which you pay back in fixed installments with a fixed interest rate. A HELOC lets you draw on equity as needed up to a set limit. Remember, using your home as security has risk implications, as non-payment could result in home loss through foreclosure.
