A Home Equity Line of Credit (HELOC) is a financial tool that homeowners can utilize by exploiting the equity of their homes as security. Similarly, a home equity loan provides homeowners the opportunity to borrow a set amount of funds by pledging their home equity as collateral. Both forms of credit depend on your home’s equity, yet each has unique advantages and disadvantages.
Let’s better understand both the home equity loan and a HELOC, delving into their advantages and shortcomings, and figure out which can better serve your financial needs.
HOME EQUITY LINE OF CREDIT (HELOC)
Positive Aspects:
1. A HELOC behaves similarly to a revolving credit line, much like a credit card, thus providing liberty in handling ongoing expenses or projects.
2. HELOCs usually come with lower setup expenses, thereby making them more pocket-friendly to initiate.
3. It offers varying interest rates that could potentially decrease the cost of borrowing when the rates decline.
4. HELOC allows you to withdraw money according to your needs within a specified limit.
5. In several scenarios, you can avail tax benefits on the interest of a HELOC depending upon the usage of funds and present tax laws.
Negative Aspects:
1. The unpredictability of interest rates could also result in higher costs if the rates surge.
2. The open structure of a HELOC can potentially lead borrowers to rack up too much debt, becoming hard to manage.
3. Failure to repay on time can lead to losing your home.
HOME EQUITY LOAN
Positive Aspects:
1. The fixed interest rates ensure that your monthly payments remain constant.
2. Home Equity Loans offer a one-time lump sum which can be beneficial for distinct expenses or consolidating debt.
3. Comes with a structured repayment plan, paving the way for better financial planning.
Related: How to Enhance the Equity of Your House Faster.
Negative Aspects:
1. Fluctuating interest rates can increase your payments.
2. Non repayment on time may result in losing your home.
HOW TO SECURE A HELOC AND A HOME EQUITY LOAN
To acquire a home equity loan or line of credit, you need to understand the process which includes factors like application, credit prerequisites, closing costs, and evaluation requirements. Moreover, you need to examine your existing financial condition, evaluate lenders, calculate your equity and comprehend the application process.
Here is the basic procedure to acquire a home equity loan or secure a line of credit:
1. Analyse Your Financial Scenario: It’s essential to find out the present market value of your home and calculate your equity, which is the difference between your property’s worth and any outstanding mortgage.
2. Exploration on Lenders: Compare offerings from different lenders including banks, credit unions, and digital lenders, evaluating their interest rates and terms. Also, consider getting advice from relatives, friends, or financial advisors.
3. Application Process: Understand your home equity, credit score, and debt-to-income ratio (DTI), which impacts your application process.
4. Property Appraisal: Your lender might require an appraisal to establish the current market worth of your home.
5. Credit Prerequisites: Check your credit report for accuracy and to ascertain your creditworthiness. A high credit score will offer you better terms. For a home equity loan, aim for a credit score of 620 or higher.
6. Closing Costs: These comprise your application fee, title search, attorney fees, among other costs.
7. Receive Loan Terms & Finalize: Once approved, your lender will furnish you with the loan details such as interest rate, loan sum, and repayment plan. Review, accept and sign the loan agreement to finalize the process.
In the end, the choice between a HELOC and a home equity loan boils down to your personal preferences and financial goals. Remember, putting your home as collateral holds risks, and non-payment could lead to foreclosure.
