A Home Equity Line of Credit, or HELOC for short, offers homeowners the convenience of a credit line by leveraging the equity of their homes as security. This is a subtype of the secondary mortgage, with the primary mortgage having the first claim on the property. Have you ever faced a dilemma between choosing a HELOC and a Home Equity Loan?
A Home Equity Loan provides homeowners with the opportunity to borrow a specific amount of money, using their home equity as security. Whether you choose a Home Equity Loan or HELOC, both allow borrowing money against the equity vested in your home. However, they distinctly vary and have their own benefits and drawbacks.
Here’s a comparison between a Home Equity Loan and a HELOC discussing their respective advantages and disadvantages to guide you in making the right choice.
HOME EQUITY LINE OF CREDIT (HELOC)
Advantages:
– HELOCs operate like a rotating credit line, much like a credit card. You have the freedom to borrow, pay back, and re-borrow, lending flexibility for recurring expenses.
– HELOCs generally have fewer upfront costs than home equity loans, making them a more economical initial choice.
– If interest rates decrease, the variable interest rates of HELOCs could lead to reduced borrowing costs.
– A HELOC allows you to withdraw funds as and when you need them, up to a pre-determined credit limit.
– Under certain conditions and current tax laws, the interest on a HELOC may qualify for deductions.
Drawbacks:
– Despite its benefit in certain situations, variable interest rates could lead to increased interest costs if the rates go up.
– The revolving nature of HELOCs might encourage borrowers to accrue debt beyond their means to repay.
– Non-repayment risks the loss of your home.
HOME EQUITY LOAN
Advantages:
– Fixed interest rates allow for predictable monthly payments.
– A one-time lump sum provides the needed money for dedicated expenses or consolidated debt.
– A structured repayment schedule allows for easier planning and budgeting for repayments.
Drawbacks:
– With rising interest rates, your payment could increase.
– Non-repayment risks the loss of your house.
Steps to Secure a HELOC or Home Equity Loan:
1. Evaluate your financial situation
2. Research Potential Lenders
3. The Application Process
4. Property Appraisal
5. Understand Credit Requirements
6. Account for Closing Costs
7. Receive Loan Terms and Close
Understanding what distinguishes a Home Equity Loan from a HELOC is key to making the right choice. A Home Equity Loan provides you with a specific sum of money upfront, repaid in fixed installments with a fixed interest rate. A HELOC offers the flexibility to withdraw equity as required, up to a certain limit.
That being said, it’s crucial to remember that as both options use your house as collateral, failing to meet repayments could result in losing your home through foreclosure.
