A Home Equity Line of Credit, usually referred to as HELOC, is a financial tool that lets homeowners access a credit line using their home’s equity as a security. It essentially acts as a second mortgage, the primary mortgage being the initial claim on the property. Have you ever had to choose between a HELOC and a home equity loan?
Similarly, a Home Equity Loan also allows homeowners to borrow a certain amount of money using their home’s equity as security. Although both permit you to lend money against your home, they each have their unique advantages and disadvantages.
Let’s comprehensively consider a home equity loan versus a HELOC, examining the advantages and disadvantages to aid in determining the most suitable option for you.
HOME EQUITY LINE OF CREDIT (HELOC)
Advantages:
A HELOC behaves much like a revolving credit line, akin to a credit card. You have the freedom to borrow, repay, and reborrow, which caters to continuous expenses or projects.
Comparatively, setting up a HELOC typically has lower initial costs than home equity loans, making it the more affordable choice.
A decrease in variable interest rates can potentially minimize your borrowing costs.
With a HELOC, you can withdraw funds as and when needed over a preset period.
In some cases, interest on a HELOC might be tax-deductible depending on fund usage and current tax laws.
Disadvantages:
While variable interest rates can be a pro, they can also lead to increased interest costs if rates rise.
The revolving nature of HELOCs may lead some borrowers to amass more debt than they can manage.
Failure to repay could result in loss of the home.
HOME EQUITY LOAN
Advantages:
They offer fixed interest rates which makes your monthly repayments predictable.
A lump-sum payment option can prove useful for specific expenses or consolidating debts.
They have a well-structured repayment schedule which can ease budgeting and planning.
Disadvantages:
Rising interest rates can inflate your payments.
Failure to repay could potentially result in loss of the home.
PROCEDURE TO SECURE A HELOC AND A HOME EQUITY LOAN
Now let’s explore the steps to obtain a home equity loan and a HELOC, starting from application processes, credit requirements, to closing costs, and appraisal requirements.
1. ASSESS YOUR FINANCES
Determine your home’s current market value and compute your equity. Equity is the difference between your home’s market value and your remaining mortgage balance.
Consider your financial needs to decide the amount to borrow.
2. EVALUATE LENDERS
Compare terms and interest rates across lenders, including banks, credit unions, and online platforms.
Seek recommendations from acquaintances and financial advisors.
3. APPLICATION STAGE
Know your home equity and your credit score.
Debt-to-income ratio (DTI) will be evaluated by lenders.
4. PROPERTY APPRAISAL
Lenders may require an appraisal to assess your home’s current market value.
5. CREDIT CHECK
Scrutinize your credit report. Aim for a score of 620 or more for the best terms on a home equity loan.
6. CLOSING COSTS
Account for fees like application cost, title search, legal fees, etc., which make up your closing costs.
7. COMPLETING THE LOAN PROCESS
If approved, review the loan terms, including the interest rate, loan amount, repayment schedule, before you consent to the offer and complete the loan closing process.
In conclusion, opting between a HELOC and a home equity loan relies on your financial objectives and preferences. A home equity loan provides an upfront sum to be repaid with predictable fixed payments and interest. A HELOC lets you access equity as and when needed. Remember, failure to make timely payments could lead to the loss of your home.
