A Home Equity Line of Credit, better known by its acronym, HELOC, is a financial tool that allows homeowners to leverage the equity built up in their property to obtain a line of credit. This is essentially a second mortgage, with the first mortgage recognized as the initial lien on the property. Ever found yourself weighing up the pros and cons of a HELOC and a home equity loan?
Much like a HELOC, a home equity loan permits homeowners to borrow a set amount of money, once again using the equity of their homes as collateral. Each of these methods permits you to draw from your home equity, however, they differ in certain ways, each with its respective advantages and drawbacks.
This article aims to juxtapose a home equity loan and a HELOC, examining the advantages and disadvantages so you can identify which better aligns with your individual requirements.
HOME EQUITY LINE OF CREDIT (HELOC)
Advantages:
A HELOC operates akin to a credit card giving you a credit line which you can draw from, repay, and draw from again, offering flexibility for sustained expenses or projects.
HELOCs often entail lower setup costs than home equity loans, which makes them cost-efficient to establish.
Interest rates of a HELOC are variable and can therefore decrease over time, reducing your expenditure.
A HELOC allows you to draw funds whenever required throughout an extended period, up to a prescribed credit limit.
Interest on a HELOC may often be tax-deductible, contingent on the use of the funds and prevailing tax laws.
Disadvantages:
While variable interest rates can work favorably, they might result in higher interest costs if rates escalate.
The revolving nature of HELOCs can lead to debt accumulation if not wisely managed.
Failing to settle your HELOC debts puts your property at risk.
HOME EQUITY LOAN
Advantages:
Home equity loans offer fixed interest rates, making your monthly payments static and predictable.
You receive a one-time consolidated sum of money, advantageous for specific expenses or debt consolidation.
Home equity loans provide a fixed repayment schedule, enhancing budgeting and repayment planning.
Disadvantages:
Rising interest rates can increase your payment.
Failing to settle your home equity loan puts your property at risk.
Steps to Obtain a HELOC and a Home Equity Loan
The journey to secure a home equity loan or a HELOC includes the application process, conforming to credit prerequisites, handling closing costs, and meeting appraisal requirements.
1. Review your financials: Identify your home’s current market value and calculate your equity. Make a decision about the amount you wish to borrow.
2. Research lenders: Compare the offerings of various lenders. Get recommendations from trustworthy sources.
3. Application process: Know your equity. Understand your credit score and Debt-to-income ratio as these affect your application.
4. Property appraisal: Lenders may require an appraisal to verify your home’s current market value.
5. Credit requirements: Pull your credit report and aim to have a score of 620 or higher for a home equity loan.
6. Closing costs: Be prepared to handle closing costs which include application fee, title search, attorney fees among other costs.
7. Final stages: If your application is approved, you will receive loan terms which you need to review and agree to.
FINAL THOUGHTS
The final choice between a HELOC and a home equity loan depends on your financial aspirations and individual preferences. Just remember, using your home as collateral carries inherent risks, and failure to maintain repayments could lead to foreclosure. Be smart about your choices.
