November 11, 2019

HELOC vs. Home Equity Loan

HELOC vs. Home Equity Loan

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There could be various reasons why you are open to considering borrowing against the equity of your home, typically called a second mortgage. No matter the reasons, there are correspondingly two types of “second mortgages” that you can choose from. Understanding their basic differences and getting to know their pros and cons will help you to make a final decision that most for the most benefit you. 

What is HELOC? 

First of all, HELOC stands for “home equity lines of credit.” To put it short, HELOC works similar to a credit card, in a sense that with this type of loan, you have an option to borrow up to a particular limit of your home equity and repay the funds slowly through a period of time. 

As mentioned, similar to credit cards, HELOC contains APRs, meaning there are interest rates that could vary from time to time, fluctuating up and down based on the market trends. The interest rate for HELOC is dependant and can be defined by several factors, included but not limited to rate decision by the Federal Reserve, market forces in the industry and more.

Considering the fluctuations with the interest rate and the fact that you are responsible to schedule your own timetable on the payments of the loan, instead of having it prepared in a lump sum, this option may be more suitable for the customers who are not entirely sure on how much cash they need and later can return. 

Pros of HELOC: 

  • There are many options of HELOC that come without any fees
  • There is a certain flexibility with the repayments 
  • You can only borrow as much money as you need 
  • If you use the funds to improve your home, there is a chance of deducting the interest on HELOC. 

Cons of HELOC: 

  • As the interest rate is mainly dependant on the trends of the market through time it may change, go up or down. 
  • In order to qualify for HELOC, you need considerable equity.

What is Home Equity Loan? 

With home equity loan you have a chance of borrowing against the equity in your home with a fixed interest rate, and corresponding fixed monthly payments. 

Similar to personal loans, when you have a home equity loan you will as well be given fixed monthly payoff schedule with fixed payments, and the exact date after which you will become debt-free. 

Although this might vary from lender to ender, typically this type of loan vary from terms of five to 30 years. Fortunately, during this time period, you will never have to worry about rising interest rates. 

The home equity loan can be used for various reasons. Some customers prefer to take it for major renovations or repairs, adding a new room, some updates on the bathroom and more. Despite these common reasons, it’s really up to you on why would you choose to apply for this. But in case you are considering it as an alternative to HELOC here are its benefits and disadvantages to make your final decision. 

Pros of Home Equity Loan: 

  • With this type of loan, you secure your fixed monthly payments, fixed interest rate, and fixed repayment schedule
  • This loan type allows you to borrow a lump sum that you can use for whatever purchase you consider making
  • Some of the home equity loans may as well not include any fees
  • If you use this loan type for remodeling or improving your home, the interest rate might as well be tax-deductible.

Cons of Home Equity Loan: 

  • There is a strong competition, as the best home equity loan rates go to the customers who have relatively good or excellent credit. 
  • In order to qualify for this type of loan, you need a lot of equity.