Home Equity Loan vs. HELOC: Which Is Right For You?
Home Equity Loan vs.
HELOC: Which Is Right For You?
Home Equity Loan versus
a Home Equity Line of Credit (HELOC) — two financial solutions that sound very
similar yet have very different pros, cons, and considerations. So, how do you
know which one is right for you? Allow us to give you the breakdown!
How are they similar?
Home Equity Loans and
HELOCs are both based on your home’s equity. If you’ve owned your home
for a few years, you’ve likely built up some equity, and you can estimate this
equity by subtracting the amount of money you owe on your mortgage from your
property’s value. The amount you can borrow in a Home Equity Loan or a HELOC is
dependent on this equity.
Because both solutions
are based on your home’s equity, they often come with lower interest rates
than other types of loans. This makes them great solutions for borrowing money,
especially when you have big expenses on the horizon. Many people use
these solutions for home renovations, education expenses, vacations, medical
bills, credit card consolidation, and more.
How are they different?
Home Equity Loan:
The funds from a Home
Equity Loan are distributed to you in a lump sum at a fixed interest rate.
This means that you will receive the entirety of the funds at once and have the
same payment each month. This fixed interest rate can be beneficial if market
rates are on the rise, but keep in mind that the rate you receive typically
depends on your credit score, payment history, and income.
A Home Equity Loan is a
great solution:
-
If you have a higher
credit score.
o
A Higher credit score
results in a lower interest rate
-
If you are likely to overspend.
o
Fixed payments and one
lump sum create good guidelines.
-
If you have a specific
project or expense in mind.
o
Knowing how much money
you require for the project helps you determine how to use the lump sum.
-
If your property values
are unlikely to decline.
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o
Property values aren’t
set in stone. If your home’s value decreases, you might end up owing more than
your property is worth.Home Equity Line of
Credit (HELOC):
Opening a HELOC gives
you access to a flexible line of credit. Like a credit card, you can draw funds
from this line as needed. Most of the time, the interest rate on a HELOC can
fluctuate with the market, meaning your monthly payments aren’t set in stone.
Some months, your payments might be higher or lower. The good news: you only
pay interest on the amount of money you draw from the line. This way, you have
more flexibility in repayment.
A HELOC is a great
solution:
-
If you don’t know exactly
how much you need to borrow.
o If you have a project or future expense in mind
but you don’t know how much it will cost you yet, a HELOC allows you to borrow
only what you need, when you need it.
-
If you want flexibility
in repayment.
o You only pay interest on the amount you borrow, so
you can pace out your payments based on when and how much you borrow.
-
If you have upcoming
expenses but uncertain timelines.
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o For example, if you know that college tuition is
on the horizon but aren’t ready to borrow yet, a HELOC can give you that safety
blanket. A HELOC can also keep you covered for unexpected medical bills or
other surprise expenses.
Overall…
The best solution for
you might not be the best solution for someone else. Our team and Inspire
Federal Credit Union can help you determine whether a Home Equity Loan or HELOC
(or an entirely different solution) is best for you! Don’t hesitate to contact
us or come by one of our locations. Look at our products yourself or contact us today!
Sources:
https://www.nerdwallet.com/article/mortgages/home-equity-loan-line-credit-pros-cons
https://www.investopedia.com/mortgage/heloc/home-equity-vs-heloc/
