For some homeowners, borrowing from the from the equity, or value of ownership, in their home can be a productive way to finance major projects or expenses – such as a bathroom remodel, repairing your roof, or upgrading to modern, energy efficient appliances. There are two ways to borrow against home equity: A Home Equity Line of Credit (or HELOC), and a Home Equity Loan.
Although they may sound similar, there are fundamental differences between the two types of loans. Do you know which one would be most beneficial for you? Here’s what you need to know about Home Equity Lines of Credit and Home Equity Loans.
What is a Home Equity Loan?
Also known as a second mortgage, a Home Equity Loan is a set amount of money you are borrowing from a financial institution, secured by the equity you have built in your home. As a general rule, lenders may allow you to borrow up to 80% of the value of your home equity. Your interest rate is usually fixed for the life of the loan and is based in part on your credit reports and credit score.
You will receive your money in one complete lump sum, minus any fees and closing costs the lender may require. Your repayment terms will be explained when you are approved for the loan and usually range between five and 15 years. If the interest rate is fixed, you would pay the same amount on your loan each month.
What is a Home Equity Line of Credit?
Unlike a Home Equity Loan, a Home Equity Line of Credit is a line of credit secured by your home equity. The credit line will be open for the “draw period” – usually 10 years – and can be drawn from using convenience checks, fund transfers, or cashier’s checks made at a branch. Because the money isn’t withdrawn in one lump sum, homeowners can borrow as little or as much as needed. During the draw period, homeowners can choose to pay only the interest on the debt, a portion of the principal, or the entire balance, making it a very flexible option for those tackling multiple projects.
Once the draw period ends, the line of credit is closed and the repayment period begins. The repayment period can last up to 20 years. While Home Equity Loans often have fixed interest rates, Home Equity Lines of Credit will usually come with a variable interest rate, meaning the payment amount could change over time.
What are the Pros and Cons of Home Equity Borrowing?
The biggest advantage of borrowing from your home equity is access to large amounts of cash on your terms. If you are paying for a major expense – like a home renovation project, a college education, or consolidating medical debt – borrowing from your home equity could give you access to all the money you need in one loan, as opposed to borrowing from multiple sources and juggling payments. In addition, home equity loans usually offer lower interest rates compared to credit cards and other loans, making it less expensive to borrow the money.
On the downside, using home equity lending products could give you another payment each month against your home. If your home loses value over time, the borrowed money may leave you with negative equity, meaning you would owe more than your home is worth. Finally, if you were to become unable to make your regular payments, the financial institution holding the debt could foreclose on your home, forcing a sale to satisfy the debt.
Who Can I Turn to with Home Equity Borrowing Questions?
Taking out a loan on your home equity is a big decision and should be considered carefully before moving forward. While there are some key advantages to borrowing using a Home Equity Loan or Home Equity Line of Credit, it’s also important to consider the long-term implications for your finances.
If you are considering a Home Equity Loan or Home Equity Line of Credit, your first call should be to a SESLOC Mortgage Loan Officer. Our experts can help you determine if one of the options is right for you, and how to get started towards approval. Make an appointment today to talk to our staff and get trusted advice on how to achieve your financial goals.