A Home Equity Line of Credit, frequently shortened to HELOC, provides homeowners a credit line using their home’s equity as security. It’s a sort of junior mortgage, with the original mortgage being the first claim on the property. Have you ever pondered between a HELOC and a home equity loan?
Uniquely, a Home Equity Loan lets homeowners borrow a predetermined amount using their home’s equity as security. Both options facilitate borrowing money using your home as collateral. They’re distinct, each having their unique advantages and disadvantages.
Let’s compare and talk about the good and bad of home equity loans and HELOC to help you decide the better option for you.
HOME EQUITY LINE OF CREDIT (HELOC)
Upsides:
HELOCs operate like a revolving credit line, like a credit card. You can borrow, repay, and borrow again, offering financial flexibility for recurring costs or projects.
Setting up HELOCs usually involves lower initial costs compared to home equity loans, making it a more cost-effective choice for many.
If interest rates decrease, your borrowing costs might also decrease due to variable interest rates.
You can draw funds as needed over an extended period up to a particular credit limit with a HELOC.
In often cases, HELOC interest may have tax deductions depending on your funds utilization and the existing tax law.
Downsides:
Variable interest rates can lead to higher interest if rates increase.
The revolving nature of HELOCs can tempt borrowers into borrowing more than they can afford to repay.
Failure to repay could result in the loss of your home.
HOME EQUITY LOAN
Upsides:
Fixed interest rates imply predictable monthly payments.
You get a one-time lump sum, which could be useful for specific expenses or debt consolidation.
Home equity loans come with a structured repayment schedule, making budgeting and planning for repayments way easier.
Downsides:
Increasing interest rates could lead to higher payments.
Failure to repay could result in the loss of your home.
PRIME STEPS FOR SECURING A HELOC AND A HOME EQUITY LOAN
Let’s dive into the process from application, credit requirements, appraisal requirements, and closing costs.
1. APPRAISE YOUR FINANCIAL SITUATION
Compute your home’s current market value and your equity. Equity is the difference between your home’s value and your existing mortgage balance.
Assess your financial requirements and aims to decide how much to borrow.
2. COMPARE LENDERS
Compare different lenders like banks, credit unions, and online lenders who offer competitive interest rates and loan terms.
Also, consider recommendations from friends, family, or financial advisors.
3. APPLICATION PREPARATION
A. Understand Your Home Equity: This is the part of your home you own.
B. Credit Score: This is a three-digit number that showcases your history of handling debt. It ranges from 300 – 850.
C. Debt-to-income ratio (DTI): This is your fixed monthly debt divided by your gross monthly income, converted into a percentage to show lenders your spending habits.
4. GO THROUGH A PROPERTY APPRAISAL
The lender might need an appraisal to establish your home’s present market value.
5. CREDIT STIPULATIONS
Acquire your credit report to verify its accuracy and comprehend your credit standing. A higher credit score aids in getting better loan terms. Aim for a credit score of 620 or above for a home equity loan.
6. FINALIZING THE DEAL
Closing costs cover your application fee, title search, attorney fees, among others.
The amount payable largely depends on your location and loan type. Seek more details from your lender.
7. GET LOAN TERMS AND CLOSE THE DEAL
Upon approval, the lender will provide the loan’s terms, including interest rate, loan amount, and repayment plan.
Review all the information.
If in agreement, you accept the offer by signing the loan documents. The lender will finalize the closing process, which could involve signing legal documents and paying closing costs or fees.
In conclusion, the choice between a HELOC and a home equity loan depends on your financial goals and personal preferences. Remember, since your home is collateral, failure to repay could result in loss of your home. Always consider your repayment ability when choosing the best financial product for you.
