A Home Equity Line of Credit, typically known as a HELOC, provides homeowners the opportunity to use the equity in their property to obtain a line of credit. Essentially, it’s a secondary mortgage, with the original mortgage holding the first claim to the property. Are you pondering whether to utilize a HELOC or a home equity loan?
A Home Equity Loan provides homeowners a fixed amount of money, with their home’s equity as the security. Both of these forms encourage you to finance by leveraging on the collateral of your home but they differ in various aspects, presenting their unique pros and cons. Let’s dive into each of these options, comprehensively analyse their advantages, disadvantages and other aspects to decide which will better suit you.
HOME EQUITY LINE OF CREDIT (HELOC)
Advantages:
A HELOC works like a credit card: you can withdraw, repay and re-borrow money as required. A great option for ongoing expenditures or projects.
Lower initial costs compared to home equity loans make HELOCs an affordable option.
Variable interest rates can lead to reduced borrowing costs if the rates drop.
With a HELOC, you have the opportunity to borrow funds as necessary over a particular period, up to a specified limit.
The interest on a HELOC could be tax-deductible depending on the usage and prevailing tax laws.
Disadvantages:
Variable interest rates can also lead to increased interest costs if rates surge.
The flexibility of HELOCs might encourage borrowers to incur more debt than they can handle.
Failure to repay can result in the loss of your home.
HOME EQUITY LOAN
Advantages:
Fixed interest rates ensure predictable monthly payments.
A one-time provision of a significant amount of money, useful for specific expenses or consolidating debt.
Home equity loans feature a set repayment plan aiding in budget-friendly planning.
Disadvantages:
Increasing interest rates can cause your monthly payments to rise.
Failure to repay can result in the loss of your home.
PROCEDURE TO ACQUIRE A HELOC AND A HOME EQUITY LOAN
Here’s a step-by-step guide to obtaining a home equity loan and securing a line of credit. It covers everything from the application process, credit requirements, closing costs, to appraisal requirements:
1. Analyse your monetary situation: Calculate your home’s current market value, your equity and determine your borrowing needs.
2. Research lenders: Compare the offerings of different lenders for competitive interest rates and terms, and consider recommendations from acquaintances or financial advisors.
3. Application process: Understand your home equity, credit score, and Debt-to-income ratio (DTI) before proceeding.
4. Undergo a property appraisal: Most lenders will require an appraisal to ascertain the current value of your property.
5. Understand Credit requirements: Obtain your credit report to comprehend your credit-worthiness. Aim for a credit score of 620 or higher for a home equity loan.
6. Prepare for closing costs: These are payments towards your application fee, legal dues and other charges. Seek your lender’s advice to understand the potential expenses.
7. Receiving loan terms and closure: On approval, thoroughly review the terms of the loan (interest rates, loan amount, repayment schedule). Once you agree, sign the loan agreement, and your lender will conclude the closing process.
CONCLUSION
The decision between a HELOC and a home equity loan is a personal one, contingent on your financial goals and circumstances. A home equity loan provides a lump sum paid back in fixed returns with a defined interest rate, while a HELOC allows you to use the equity as needed within a certain limit. However, be aware of the risks pertinent to using your home as security, as missed payments could lead to foreclosure.
