A Home Equity Line of Credit (HELOC) provides homeowners the facility to open a line of credit by leveraging their home equity as a security measure. This financial product functions as a type of secondary mortgage, with the primary mortgage taking precedence. Are you debating between a HELOC and a home equity loan?
Home Equity Loans enable homeowners to borrow a pre-defined lump sum by using their home equity as a guarantee. Both mechanisms let you borrow finances with your property as asset protection, but they have unique features with their individual advantages and disadvantages.
Let’s compare home equity loans with HELOC and discuss their benefits and drawbacks and more to assist you in making a more informed decision.
HOME EQUITY LINE OF CREDIT (HELOC)
PROS:
HELOCs behave like a renewable credit line, closely resembling a credit card. This dynamic nature allows borrowing, repayment, and repeated borrowing, adding flexibility for continuous expenses or projects.
Setting up a HELOC often demands lesser upfront costs than home equity loans, making it more cost-effective.
If the interest rates drop, your borrowing costs may decrease due to the variable interest rates.
A HELOC facilitates drawing funds whenever required over a prolonged period, limited by a pre-set credit limit.
Depending on the usage of the funds and the prevailing tax law, HELOC interest may be tax-deductible.
CONS:
Although variable interest rates can be beneficial, they can lead to greater interest expenses if rates increase.
The revolving nature of HELOCs can lure borrowers into accruing excessive debt.
Non-repayment can result in property loss.
HOME EQUITY LOAN
PROS:
The fixed interest rates associated with home equity loans render the monthly payments predictable.
The one-time lump-sum money received proves helpful for distinct expenses or debt consolidation.
A set repayment plan associated with home equity loans simplifies budgeting for repaying.
CONS:
A rise in interest rates may augment your payment.
Non-repayment can result in property loss.
ACQUIRING A HELOC AND A HOME EQUITY LOAN
Here’s an overview of the process involved in obtaining a home equity loan and securing a line of credit, including application procedures, credit conditions, closing costs, and appraisal requisites.
1. ASSESS YOUR FINANCES
Evaluate the current market value of your home and compute your equity, which is the difference between your home’s value and the outstanding mortgage balance.
Study your financial needs and objectives to ascertain the amount you need to borrow.
2. EXPLORE LENDERS
Compare different lenders, such as banks, credit unions, and online platforms, looking for competitive interest rates and terms.
Look for recommendations from friends, family, or financial advisors.
3. APPLICATION PROCEDURE
Understand your Equity: Home equity pertains to the portion of your home you own.
Credit score: This three-digit number signifies your past track record in managing debts, ranging between 300 and 850.
Debt-to-Income ratio (DTI): Lenders evaluate your DTI, which is your fixed monthly debt divided by your gross monthly income, converted into a percentage.
4. UNDERGOING A PROPERTY APPRAISAL
The lender may necessitate an appraisal to gauge your home’s current market value.
5. CREDIT TERMS
Get hold of your credit report to ensure its accuracy and comprehend your creditworthiness. A positive credit score facilitates better terms.
Aim for a credit score over 620 for a home equity loan.
6. CONCLUSION COSTS
Closing costs cover application fees, title search, attorney fees, among other charges.
Discuss with your lender to understand how much you need to spend on closing costs.
7. RECEIVE LOAN TERMS AND CONCLUDE PROCEDURE
If approved, the lender will share the loan terms, including interest rate, loan amount, and repayment schedule.
Examine the loan terms and the associated fees.
Upon consenting to the terms, sign the agreement.
The lender will wrap up the closing process, which may include signing legal documents and settling the closing costs or fees.
In conclusion, deciding between a HELOC and a home equity loan heavily relies on your financial aspirations and personal preferences. While home equity loans provide a fixed binary payment at a fixed interest rate, a HELOC offers the ability to draw from the equity when required up to a certain limit. However, remember that leveraging your home as collateral poses risks. Failure in making timely payments could lead to home loss.
