A Home Equity Line of Credit, often shortened to HELOC, offers homeowners the chance to utilize the equity accumulated in their house in exchange for a line of credit. It operates similarly to a second mortgage, as the primary mortgage stands as the first lien on the property. Ever faced the choice between a HELOC and a home equity loan?
A Home Equity Loan provides homeowners with a fixed amount to borrow, using the equity in their homes as a form of security. Both loan types make the most of your home’s collateral, yet each carries its own unique advantages and disadvantages.
Here we compare a home equity loan with a HELOC, exploring various benefits and drawbacks, to assist you in deciding which might be a better fit for your circumstances.
HOME EQUITY LINE OF CREDIT (HELOC)
ADVANTAGES:
HELOCs operate much like a credit card’s revolving line of credit; you can borrow, repay, and then borrow again, providing adaptability for continuous expenditures or ventures.
In comparison with home equity loans, HELOCs typically incur lower upfront costs, making them more budget-friendly.
A variable Interest Rate might lower your borrowing costs should the rates decrease.
A HELOC furnishes you with the independence to withdraw funds as needed throughout time, up to a pre-established limit.
In various circumstances, HELOC interest might be tax-deductible, contingent upon the usage of the funds and current tax legislation.
DISADVANTAGES:
The variable interest rates, while advantageous in certain situations, could potentially increase your borrowing costs should the rates surge.
The perpetual nature of HELOCs might lead borrowers to accrue excessive debt.
Non-repayment could potentially result in the loss of your home.
HOME EQUITY LOAN
ADVANTAGES:
The fixed interest rates allow for predictable monthly payments.
You receive a one-time lump sum, which suits specific expenditures or debt consolidation.
Home equity loans offer an organized repayment schedule, aiding budgeting and repayment planning.
DISADVANTAGES:
An increase in interest rates can hike up your payments.
Failure to repay can lead to the loss of your home.
PROCEDURE TO SECURE A HELOC AND A HOME EQUITY LOAN
To understand the steps involved in securing a home equity loan or a line of credit, let’s examine the application process, credit prerequisites, closing costs, and appraisal requirements.
1. ASSESS YOUR FINANCIAL STATUS
Calculate your home’s current market value and ascertain your equity. The value of your home, subtracted by your outstanding mortgage balance, equals your equity.
Gauge your financial needs and objectives to determine the amount you wish to borrow.
2. COMPARE LENDERS
Differentiate between various lenders, such as banks, credit unions, and online lenders. Find the ones that offer competitive rates and terms.
3. APPLICATION STAGE
Home equity refers to the share of your home that is owned by you.
Your credit score is a reflection of your past debt management. It can range from 300 to 850.
Your Debt-to-income ratio (DTI) will be examined by the lender. It is the quotient of your monthly fixed debt and gross monthly income, represented in percentage.
4. PROPERTY APPRAISAL
The lender may necessitate an appraisal to find your home’s current market value.
5. CREDIT PREREQUISITES
Obtain your credit report to verify its accuracy and comprehend your creditworthiness. A strong credit score could secure better terms.
Aim for a credit score of 620 or above for a home equity loan.
6. CLOSING COSTS
Closing costs refer to several fees, such as your application fee, title search, and attorney fees. The cost will depend on your location and the specific loan type in question.
7. SECURE LOAN TERMS AND FINALIZE
Once approved, the lender will lay out the loan terms, including interest rate, loan amount, and repayment schedule.
Go through the loan terms and, if satisfied, accept the proposition by signing the loan contract.
The lender will finalize the closing process, which may mandate signing legal documents and paying any closing costs.
In conclusion, the decision to go for a HELOC or a home equity loan is based on your financial objectives and individual inclinations. While a home equity loan offers a lump sum upfront that you repay in fixed instalments at a fixed interest rate, a HELOC allows you to take advantage of your equity as per your requirement up to a certain limit.
However, be cautious, as using your home as collateral carries associated risks. Failure to make timely payments could lead to a possible foreclosure of your home.
