A Home Equity Line of Credit, commonly referred to as a HELOC, is essentially a type of loan that homeowners can take, leveraging the equity they’ve gathered in their property. This is akin to a second mortgage, in which the first mortgage serves as the initial lien on the property. Have you ever had to choose between a HELOC and a home equity loan?
A home equity loan offers a fixed amount of money to homeowners upon leveraging their accumulated home equity. You can borrow money against your home with both options, but they each have unique characteristics alongside their own advantages and drawbacks.
Let’s compare and contrast home equity loans and HELOCs, talking about their pros and cons, to enable you to make better decisions.
HOME EQUITY LINE OF CREDIT (HELOC)
PROS:
1. The HELOC is a revolving line of credit, resembling a credit card; you can borrow, pay back, and borrow again, catering to ongoing financial needs or projects.
2. Setting up a HELOC often saves you on initial costs compared to home equity loans.
3. If interest rates fall, Variable Interest Rates could reduce your borrowing costs.
4. HELOC allows you to withdraw funds as required up to a set credit limit.
5. The interest on a HELOC might be tax-deductible, depending on the fund usage and prevailing tax rules.
CONS:
1. Rising interest rates might inflate your interest costs.
2. The revolving aspect of HELOCs might encourage poor financial management, leading to unmanageable debt.
3. Home forfeiture is a possibility if you fail to repay.
HOME EQUITY LOAN
PROS:
1. You get a one-off lump sum, ideal for specific expenses or consolidating debt.
2. Making budgeting easier, these loans come with a systematic repayment scheme.
3. Your monthly payments are predictable due to a fixed interest rate.
CONS:
1. If interest rates increase, so does your repayment figure.
2. Failing to pay back your loan could lead to home forfeiture.
PROCEDURE FOR OBTAINING A HELOC AND A HOME EQUITY LOAN
The process of securing a home equity loan or a line of credit involves the application process, credit prerequisites, closure charges, and appraisals.
STEPS:
1. ASSESS YOUR FINANCES
Identify your house’s current market value and your equity. Equity is the difference between your property’s market value and your remaining mortgage balance. Ascertain the loan amount you need by examining your financial goals and needs.
2. HUNT FOR LENDERS
Make comparisons between various lenders, including banks and online platforms. Opt for those offering attractive interest rates and terms. Recommendations from friends, family, or financial aides could be beneficial.
3. APPLICATION PROCESS
Know Your Equity: It refers to the ownership you have in your house.
Credit score: It is a three-digit representation of your debt handling ability in the past. A credit score can range between 300 and 850.
Debt-to-income ratio (DTI): Your lender will consider your DTI, which is the ratio of your fixed monthly liabilities to your monthly income.
4. HOUSE APPRAISAL
The lender may need an appraisal to determine your property’s current market value.
5. CREDIT REQUIREMENTS
Ensure your credit report is error-free. A commendable credit score will get you good terms.
Try to achieve a credit score of 620 or above for a home equity loan.
6. CLOSING COSTS
Closing costs consist of your application fee, title search, attorney charges, and other fees. They can vary depending on your location and exact loan type.
7. LOAN TERMS AND CLOSING
Upon approval, the lender will present you with the loan terms, like the interest rate, loan amount, and repayment scheme.
Examine the interest rates, repayment schedules, and other charges in the loan terms.
After agreeing with the terms, sign the loan agreement to accept the offer.
The lender will execute the closing process, which may require signing legal documents and payment of closing costs or fees.
In conclusion, deciding between a HELOC and a home equity loan depends on your financial goals and preferences. A home equity loan offers a fixed lump sum to be paid back in fixed installments with a steady interest rate. On the other hand, a HELOC allows flexible access to your equity up to an imposed limit.
Remember, using your house as collateral involves risks, as a failure to make payments could result in losing your home through foreclosure.
