A Home Equity Line of Credit, also known as HELOC, is a financial facility enabling homeowners to withdraw credit against the equity available in their homes. This credit line acts as a second mortgage while the original mortgage remains as the main lien on the property. Ever wondered about choosing between a HELOC and a Home Equity Loan?
A Home Equity Loan also allows homeowners to borrow a fixed sum by leveraging their home’s equity. Both methods involve borrowing against your property but display some substantial distinctions, each backed up by its specific advantages and drawbacks.
We’re going to delineate the features of a Home Equity Loan and a HELOC, discussing their pros and cons to facilitate your decision-making process.
HOME EQUITY LINE OF CREDIT (HELOC)
Advantages:
Operating much like a credit card, HELOCs allow you to borrow, repay, and reborrow, offering flexibility for ongoing expenditures or projects.
HELOCs usually have lower upfront costs compared to home equity loans, making them more accessible.
Fluctuating Interest Rates can be beneficial if the rates fall, leading to reduced borrowing costs.
HELOC provides the opportunity to draw funds as needed over an extended period, up to a certain credit limit.
In many instances, HELOC interests may qualify for tax deductions, depending on their usage and current tax regulations.
Disadvantages:
While fluctuating interest rates can be beneficial, it can also lead to increased interest costs if the rates climb.
Easy access to funds might lead borrowers into excessive debt accumulation.
Non-compliance in repayment can result in loss of the home.
HOME EQUITY LOAN
Advantages:
Stable interest rates leading to predictable monthly payments.
A one-time lump sum of money, ideal for handling specific expenses or consolidating debts.
Repayment for home equity loans is structured, facilitating budgeting and repayment planning.
Disadvantages:
Increments in interest rates can lead to amplified payments.
Repayment non-compliance can lead to loss of your home.
PROCEDURES TO ACQUIRE A HELOC OR A HOME EQUITY LOAN
Here is a step-by-step walkthrough to give you an overview of how to get a home equity loan or line of credit:
1. ANALYZE YOUR FINANCES
Define your home’s market value and measure your equity. Equity is the residual value after subtracting the existing mortgage balance from the current market value.
Understand your financial requirements to determine the borrowing amount.
2. EXPLORE VARIOUS LENDERS
Compare interest rates and terms offered by different lenders including banks, online lenders, and credit unions.
Take into account recommendations from trusted sources.
3. APPLICATION PROCEDURE
Learn about your Home equity which pertains to the share of the house you actually own.
Remember, credit scores range from 300 to 850 and is a reflection of your past credit behavior.
Your lender will assess your Debt-to-Income (DTI) ratio, calculated by dividing your fixed monthly debt by your gross monthly income.
4. PROPERTY APPRAISAL
The lender may require an appraisal to ascertain the current market value of your property.
5. CREDIT RATING REQUIREMENTS
Obtain and review your credit report for accuracy and assess your creditworthiness. A higher credit score secures better terms.
Strive for a credit score of 620 or above for a home equity loan.
6. CLOSING COSTS
These costs cover application fees, title search, attorney fees, and other charges.
Ask your lender for detailed information on these costs which may vary depending on loan type and location.
7. LOAN TERMS RECEIPT AND CLOSURE
Following approval, the lender will provide you with the loan terms including the amount, interest rate, and repayment schedule.
Once terms are agreed upon and the loan agreement is signed, the lender finalizes the closing process involving document signing and payment of closing costs.
In conclusion, choosing between a HELOC and a Home Equity Loan is contingent upon your financial requirements and personal preferences. A HELOC provides continuous access to funds up to a specified limit while a Home Equity Loan facilitates a one-time fixed amount disbursement with fixed payments. Always remember, using your home as collateral comes with the potential risk of foreclosure if repayments aren’t made.
