Although a home equity loan and HELOC (Home Equity Line of Credit) are secured in the same way, the two loans can prove to have many differences from each other, even in the way the money is received. If you’re a newcomer to mortgages and are considering either loaning options, it is beneficial to learn about each of these loans and their differences first.
At First Glance
A home equity loan is a lump sum of money that an individual can apply for from a lender. On the other hand, a HELOC is a line of credit, usually relied upon for larger expenses and things such as debt consolidation. Now to explore these details further, let’s have a closer look at both to understand both options better.
What Is A HELOC?
A home equity line of credit, better known as a HELOC, is a revolving line of credit, similar to using a credit card. When all money is repaid on one’s HELOC, their line of credit is completely replenished as well. To add, users of this option are usually given a draw period of around 10 years and a repayment period ranging from 10 to 20 years, depending on the lender and the individual’s situation.
What Is A Home Equity Loan?
A home equity loan is a sum of money that a borrower can apply for from a lender. The amount of this loan is dependent on the equity of the applicant’s home. This kind of loan has a fixed interest rate, monthly payments, and specialized terms.
What Is The Difference Between The Two?
One of the more evident differences between a home equity loan and a HELOC is the interest rate attached to both services. A HELOC has a varied rate which is typically variable, meaning it is subjected to change based on the prime rate set by the banks. A home equity loan has a fixed rate that cannot be expected to fluctuate, meaning a borrower can expect to pay the same amount each month, without deviation. On that same note, the repayment process for HELOC users is different than individuals who own a home equity loan. HELOC users receive draw periods on their lines of credit where they can either pay a larger or smaller amount based on their interest-only payments. When the repayment period arrives for HELOC users, there is a principal plus interest that is added to the amount of money taken out, meaning the monthly payment can cost more from what it was during the draw period.
Home equity loans also require credit history, background checks, and an individual’s LTV ratio compared to a HELOC where the equity is based upon a household. HELOC users also have the luxury of being able to borrow eighty to ninety-five percent of their home’s equity, putting it on their line of credit. In sum, although both loaning options have many differences and are used in their own respective situations, both services are meant to help one borrow money for their home needs, whatever that might be.
Which Option Is Better For You?
Now that you’re aware of how both loaning services can benefit you, which one might be the best for your situation? The most important thing to consider is what you actually require the loan for, along with your current financial situation. In a setting where you would need a specific amount of money in a quick fashion, a home equity loan could be right for you. On the other hand, if you’re wanting to make home improvements but are uncertain of how much money will be necessary, applying for a HELOC may be a more appropriate choice. For any questions, concerns or inquiries regarding home equity loans and HELOC, please feel free to contact us.