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Home equity loans and home equity lines of credit (HELOCs) are two ways to borrow money using the equity in your house. A home equity loan is a lump sum paid back in fixed installments, whereas a HELOC is a line of credit with a variable interest rate. Both typically let you borrow up to 85% of the value of your house less the balance of any outstanding mortgages.
What is a home equity loan?
With a home equity loan, which is a secured loan with a fixed interest rate and repayment term of typically up to 30 years, you can borrow a specific amount against your equity. Your credit score, payment history, loan amount, and income all affect the interest rate.
You decide how to use the funds from a home equity loan. Some people employ it to pay for significant upkeep or remodeling projects, such as building an addition, gutting and remodeling a kitchen, or modernizing a bathroom. Some people take out a lower-interest, fixed-rate home equity loan to pay off high-interest credit card debt.
Pros of a home equity loan
Cons of a home equity loan
What is a home equity line of credit?
A HELOC, or home equity line of credit, is a credit limit based on the amount of equity in your house. A HELOC, as opposed to a home equity loan, has a variable interest rate, which means that it may rise or fall along with your monthly payments at predetermined intervals. Some HELOCs have low introductory rates for a while (for instance, six months), after which they switch to higher but still variable rates.
Similar to a credit card, a HELOC is a revolving line of credit that allows you to borrow money, use it, and then pay it back. However, you can only use the money during the draw period, which is typically 10 years. You might only have to pay interest during this period. You’ll have a certain amount of time after the draw period is over to pay back the money you borrowed plus interest, typically up to 20 years.
Pros of a HELOC
Cons of a HELOC
How do I choose between a home equity loan and a HELOC?
Both options have benefits, but if you know exactly what you’ll do with the money and don’t need much flexibility, a home equity loan might be a better option. If you prefer a fixed interest rate and constant monthly payment, a home equity loan might be a better option.
However, if you want to borrow as little or as much as you want, whenever you want, have upcoming expenses like college tuition and don’t want to borrow until you’re ready, and don’t mind if your payment fluctuates, a HELOC may be a better option.
Can you have a HELOC and a home equity loan?
The number of home equity loans or lines of credit you can have at once is theoretically unlimited, but as your equity decreases, it will become more difficult for you to qualify for each new loan.
For example, if your home is worth $500,000 and you have two home equity loans totaling $425,000, you have already borrowed 85% of its value, which is the maximum allowed by many home equity lenders.
Additionally, a lender may charge higher interest rates for additional loans or credit lines, particularly if you request a second loan from them.
How does the Fed rate increase impact home equity products?
The prime rate, which is typically three percentage points higher than the fed funds rate, serves as the foundation for many lenders’ home equity product rates. Due to the Federal Reserve’s recent rate increases, home equity loans and HELOCs are now more expensive.
You do have some degree of certainty regarding borrowing costs if you’re looking for a home equity loan because the interest rates on these products are typically fixed. HELOCs, however, differ in that their interest rates are variable. Following Fed rate hikes could result in an increase in your monthly payments.
You can borrow money using your home equity with home equity loans and HELOCs, but they work differently. Think about why you need the money, how much you need, and whether you plan to borrow more money in the future. Once you’ve made a choice, repair your credit and shop around for the best interest rate.
FAQ
What is the difference between HELOC and home equity?
With a home equity loan, you can take out a one-time loan against the value of your house. An open line of credit can be requested by homeowners through a HELOC, which also leverages the equity in a home. Then, as required, you may borrow up to a fixed amount.
What is the downside to a HELOC?
Lack of discipline on the part of the borrower is one drawback of HELOCs. HELOCs make it possible for you to make interest-only payments throughout the draw period, making it simple to access cash without thinking about the potential financial repercussions.
How do you determine between HELOC and home equity loan?
A HELOC is typically a better option if you require long-term access to funds, while a home equity loan may be more suitable if you require funds for a significant one-time expense. You should also think about the potential effects on your finances of a fixed rate versus a variable rate.
Is there a better option than a HELOC?
If you know the exact amount you need for a fixed expense, a home equity loan is preferable to a home equity line of credit (HELOC). You desire debt consolidation but do not desire to open a new credit line and run the risk of incurring additional debt.