The Home Equity Line of Credit, or HELOC, is a finance tool that enables homeowners to draw from a line of credit, using home equity as security. It resembles a kind of second mortgage where the principal mortgage is the first claim on the property. Have you ever wondered whether a home equity loan might be more suitable than a HELOC?
A Home Equity Loan allows homeowners to borrow a fixed amount, also using their home equity as security. While both offer the opportunity to borrow against home equity, they have unique features, pros and cons.
We’ll dissect a home equity loan compared to a HELOC, discuss their pros and cons, and more, to help you make an informed decision.
HOME EQUITY LINE OF CREDIT (HELOC)
ADVANTAGES:
A HELOC works like a credit card with a revolving line of credit, so you can borrow, repay, and borrow again, ideal for ongoing expenses or projects.
Compared to home equity loans, setting up a HELOC typically has lower upfront costs.
Varied Interest Rates, if interest rates decrease, your borrowing costs may decrease.
With a HELOC, you can withdraw funds as needed through a determined credit limit.
Often, HELOC interest could be tax-deductible depending on the funds’ usage and the current tax laws.
DRAWBACKS:
While competitive interest rates could be advantageous, they can lead to increased interest costs when rates rise.
The revolving credit nature of HELOCs could lead to borrowers taking on more debt than they can handle.
Non-repayment can result in losing your home.
HOME EQUITY LOAN
ADVANTAGES:
Fixed interest rates ensure stable monthly payments.
Receiving a one-time lump sum is helpful for specific expenses or debt consolidation.
Structured repayment schedules make budgeting and planning for repayments simpler.
DRAWBACKS:
Increasing interest rates can inflate your payments.
Non-repayment can result in losing your home.
PROCEDURE TO SECURE A HELOC AND HOME EQUITY LOAN
We’ll now explore the steps necessary to secure a home equity loan and line of credit.
1. EVALUATE YOUR FINANCIAL SITUATION
Determine the market value of your home and calculate your equity by subtracting the remaining mortgage balance.
2. COMPARE LENDERS
Survey various lenders, including banks, credit unions, and online platforms for advantageous interest rates and terms.
3. FILL OUT AN APPLICATION
Your home equity, credit score, and Debt-to-Income ratio (DTI) play a crucial role.
4. CARRY OUT A PROPERTY VALUATION
The lender may need a property appraisal to establish your home’s current market value.
5. ANALYZE CREDIT REQUIREMENTS
Ensure your credit report is accurate. A good credit score can furnish you with better terms.
6. CONSIDER CLOSING COSTS
Closing costs may include application fees, title search, lawyer fees, and other costs.
7. AGREEMENT AND CLOSURE
On approval, your lender will share the loan terms. Read and sign only if the terms are agreeable.
In summary, the better option between a home equity loan and a HELOC depends on your personal preferences and financial goals. Remember, using your home as collateral comes with certain risks, like the potential loss of your home due to non-payment.
