In home ownership, it is essential to have the right financial tools on hand. This includes a solid understanding of home equity loans and home equity lines of credit (HELOCs).
These are unsecured loans taken out based on your home’s equity. They are similar in that they let you borrow money to cover expenses. However, they differ, especially regarding interest rates, repayment terms, and qualifying.
If you’re considering asking for a home equity loan or line of credit, you need to know the difference. Read on to learn the home equity loan vs HELOC features. We’ll help you decide which one is right for you.
What Is a Home Equity Loan?
With a home equity loan, homeowners can borrow money using the value of their property as collateral. Equity is the portion of your home that you own outright. It is calculated by deducting the balance of your mortgage debt from the home’s current market value.
For example, if your home is worth $200,000 and you still owe $100,000 on your mortgage, you have $100,000 in equity. To secure a home equity loan, homeowners must have a good credit score and a relatively low debt-to-income ratio.
Home equity loans are generally offered with fixed interest rates and terms, and payments are typically spread out over a period, such as 10 or 15 years. This helpful resource can let you define home equity further.
What Is a HELOC?
Homeowners can borrow money using their home’s equity through a sort of loan known as a HELOC. Borrowing is still flexible in contrast to a home equity loan.
With a HELOC, homeowners are approved for a certain amount of credit. They can then borrow against that credit up to the credit limit.
HELOCs are typically offered with adjustable interest rates, and homeowners only need to pay interest on the amount they borrow. You’ll have lower monthly payments if you only use a small portion of your credit line. However, if you borrow more, your payments will be higher.
Which One to Choose: Home Equity Loan vs HELOC
When deciding between a home equity loan and a HELOC, you must consider your financial goals and needs. Here are a few factors to consider:
Purpose of the loan
A home equity loan may be a better option if you have a specific purpose in mind for the loan, such as paying off debt or financing home improvements. With a fixed interest rate and set terms, you’ll know exactly how much you need to borrow and what your monthly payments will be.
A HELOC may be a better option if you’re still determining exactly how much money you’ll need or when you’ll need it. The flexible borrowing and adjustable interest rate can be helpful if you need to borrow money on an as-needed basis.
Know the Difference!
The differences between a home equity loan vs HELOC are significant. Home equity loans are fixed loans, while HELOCs feature revolving credit. It is essential to understand the pros and cons of each before making a decision.
Prioritizing your own objectives and comprehending your financial condition are crucial phases in the home equity loan or HELOC application process. Speak with a financial advisor and research the best loan for your situation before making a final decision.
Get started now and begin the journey toward financial freedom.
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