The Home Equity Line of Credit, also known as HELOC, is a financial solution that enables homeowners to tap into the equity they’ve amassed in their property. This allows them to utilize their home equity as collateral for a line of credit. It’s a form of second mortgage with the original mortgage having the first lien. Have you thought about deciding between a home equity loan and a HELOC?
A home equity loan, on the other hand, permits homeowners to borrow a specific sum of money using their home equity as a guarantee. Both options allow borrowing against the equity in your home. Each carries its unique features, with specific advantages and disadvantages.
Let’s delve into the juxtaposition of a home equity loan and a HELOC and go over their advantages, disadvantages, and more specifics to aid you in making an informed decision.
HOME EQUITY LINE OF CREDIT (HELOC)
PROS:
Identical to a credit card, HELOCs work as a revolving credit line where you can borrow, repay, and re-borrow, offering flexibility for continued expenses or projects.
HELOCs usually have reduced initial costs in comparison to home equity loans, making them more budget-friendly.
If interest rates decrease, the variable interest rates may lower your borrowing costs.
A HELOC allows you to draw funds as needed over a longer period, up to a specified credit limit.
Under certain conditions and based on the current tax law, HELOC interest may be tax-deductible.
CONS:
Variable interest rates might result in higher interest costs if rates increase.
The revolving feature of HELOCs could lure borrowers into accumulating higher debt than they can manage.
Failure to repay your HELOC could lead to loss of your property.
HOME EQUITY LOAN
PROS:
Home equity loans offer fixed interest rates, hence predictable monthly payments.
A one-time lump sum of money is made available, which could prove useful for specific expenses or debt consolidation.
Home equity loans offer a structured repayment schedule, meaning it’s easier to budget and plan for repayments.
CONS:
Increased interest rates could imply higher payments.
Failure to meet your repayment obligation could lead to the loss of your home.
PROCESS TO OBTAIN A HELOC AND A HOME EQUITY LOAN
Let’s go over the procedure for acquiring a home equity loan and establishing a line of credit, beginning with the application process, credit prerequisites, closing costs, and appraisal requirements.
INITIAL STEP – ASSESS FINANCIAL STATUS:
Work out your home’s current market value and your equity. The equity is calculated as the difference between your home’s worth and your outstanding mortgage balance. Determine your borrowing requirement by analyzing your financial needs and goals.
SECOND STEP – EXPLORE LENDERS:
Compare various lenders inclusive of banks, credit unions, and online lenders based on competitive interest rates and terms. Gathering recommendations from family, friends, or financial advisors is worthwhile.
THIRD STEP – APPLICATION PROCESS:
Understand your Home Equity, which refers to the portion of your home that you expediently own.
Credit Score: A three-digit number representing your previous debt management capabilities, ranges between 300 and 850.
Debt-to-Income ratio (DTI): Your potential lender will scrutinize your DTI, which details your gross monthly income in relation to your fixed monthly debt, expressed as a percentage.
FOURTH STEP – UNDERGO A PROPERTY APPRAISAL:
Lenders may necessitate an appraisal to ascertain the up-to-date market value of your property.
FIFTH STEP – CREDIT REQUIREMENTS:
Order a credit report to ensure its accuracy and for a clearer understanding of your credit score. A favorable credit score could earn you better loan terms. Aim for a score of 620 or above for a home equity loan.
SIXTH STEP – CLOSING COSTS:
Closing costs cover a variety of fees including your application fees, attorney fees, and title search costs. The cost structure depends on your exact loan type and locale. More information on the closing costs can be sought from your lender.
SEVENTH STEP – LOAN TERMS & CLOSURE:
Upon approval, your lender will offer the loan terms inclusive of interest rate, loan amount, and repayment plan. Thoroughly review these details before acceptance. You can accept the offer by signing the loan agreement. The lender will facilitate the closing process, including signing legal documents and payment of any closing costs or associated fees.
IN CONCLUSION:
The choice between a HELOC and a home equity loan fundamentally depends on your financial aspirations and personal preferences. A home equity loan offers a one-time lump sum that you repay in fixed installments with a constant interest rate. A HELOC, however, permits you to withdraw equity as required up to a predefined limit.
Remember, since your home serves as the collateral, non-payment could cost you your home due to foreclosure.
