Many people often ask, "Should I get a home equity loan?" An equity loan, whether it is a home equity loan or a line of credit, is similar to a second mortgage and offers a way to conveniently resolve financial setbacks. Although home equity loans and lines of credit are both are good options, each one has benefits and limitations. It is important to understand the difference between a home equity loan and line of credit before making a decision on using one or the other.
Home Equity Loans
A home equity loan offers a fixed amount of money and your home is the collateral. Payments are based on fixed interest rates, which means you will be making the same payment each month for the life of the loan. Failure to make payments may result in the foreclosing of your home by the lender.
Although the amount that you can borrow may vary with respect to the lending institution and state regulations, usually you can borrow up to 80% of the equity of a home.
A home equity loan is a comparatively secure type of equity loan, since the payment amounts are fixed for the term selected by the borrower. Comparing interest rates and negotiating with lending institutions can make the deal even more reasonable.
Want to know more about refinancing your home? Watch First Alliance employee Pam Evans discussing refinancing on KIMT.
Home Equity Line of Credit
A home equity line of credit (HELOC) offers you an opportunity to withdraw cash as many times as you need to by establishing a line of credit to draw from. The repayments are set according to adjustable interest rates, so the amount you will be repaying may vary.
Like home equity loans, the home is still considered collateral in a HELOC. A HELOC comes with a number of benefits such as multiple withdrawals, tax benefits, and easy repayments, but these loans are a riskier long-term solution because they have adjustable interest rates. The conditions offered with HELOCs might differ between financial institutions, so you should analyze and find out which one suits you the best.
How Should You Choose?
There are some things to think about before choosing any of the equity loan options:
Withdrawal Amount- Home equity loans offer a fixed amount that can be received only once, but HELOC offers multiple withdrawals up to a certain limit whenever they are needed.
Interest Rate- The interest rate remains fixed in case of the home equity loan, but it is adjustable for HELOC and there is a chance of fluctuation, similar to a credit card's interest rate.
Repayment Method- With home equity loans, repayments are fixed amounts to be paid monthly. A HELOC has comparatively higher monthly payments and a choice to pay interest in installments in the beginning.
The Bottom Line
The factors mentioned above can help you make a wise decision about your financial future. The choice of whether a home equity loan or a home equity line of credit differs from person to person. Every person has unique financial situations so the considering all of the above factors in your own financial state is important. Home equity loans and HELOCs (home equity line of credit) are both convenient when you need to borrow money. It is important to match your needs for the loan with the pros and cons of each type of loan before making securing one of these types of loans. Talking to a lender at your financial institution can also help you determine the best fit.