Homeowners can access the equity in their homes through two main financial products – a Home Equity Line of Credit (HELOC) or a Home Equity Loan (HEL). Both use your built-up home equity as security, but they come with unique features, benefits, and drawbacks.
In simpler terms, a HELOC, similar to a credit card, permits flexible borrowing against your home equity, while an HEL offers a fixed loan amount for a one-time expense. They could be viewed as second mortgages, with the first mortgage having the initial claim on the property. It’s important to weigh a HELOC against an HEL to decide which suits you best.
HELOC PROS:
1. HELOCs function like revolving credit, allowing you to borrow as needed, and repay and borrow again. This flexibility eases ongoing expenditure or long-term projects.
2. They typically have lower initial costs making them more accessible.
3. Variable interest rates may decrease borrowing costs if the rates dip.
4. You have an extended period to draw funds up to a predetermined limit.
5. In many instances, you might be able to deduct the interest from HELOC on tax, depending upon the tax laws and use of funds.
HELOC CONS:
1. Although variable interest rates can be a benefit, if rates rise, interest costs could inflate.
2. The open-ended nature of HELOCs could lead to potential debt accumulation.
3. There is a risk of losing your home if failing to timely repay.
HEL PROS:
1. HEL come with fixed interest rates offering payment predictability.
2. A one-off lump sum received can be beneficial for specific expenses or debt consolidation.
3. HEL offers a structured repayment plan, aiding budgeting and repayment planning.
HEL CONS:
1. Rising interest rates could inflate your payments.
2. Non-repayment could result in losing your home.
OBTAINING HELOC AND HEL
The process of securing a HEL or HELOC involves:
1. Assessing your financial status, determining your home’s market value.
2. Research and compare various lenders.
3. During the application process, be aware of your equity, credit score, and debt-to-income ratio (DTI).
4. Undergoing property appraisal, if required.
5. Meeting credit requirements.
6. Accounting for closing costs, including application fee, title search, attorney fees, among others.
7. Reviewing and signing off on loan terms at closing, also, this process may involve paying off any remaining closing fees or costs.
Conclusively, your decision between a HELOC and an HEL will depend on your financial aims and personal preferences. An HEL offers a fixed amount and fixed repayments with an upfront sum, while a HELOC provides flexibility to tap into your equity as required, up to a certain limit. However, caution is advised. Using your property as security carries risks and potential loss of your home if fails to meet payments.
