There are disadvantages and advantages to both home equity loans (Hel) and home equity line of credit (HELOCs), making the choice between the two dependent on your unique needs and circumstances.
Amount You Can Borrow
Both home equity loans and lines of credit allow you to borrow up to 100% of the equity in your home. In some cases, lenders will even allow you to borrow up to 125% of your home equity.
Qualifying Requirements
Both Hels and HELOCs require You show a proof of the following:
- * Personal income;
- * Ownership of the home ownership (i.e. Title);
- * Current mortgage;
- * Current value of the home (via a professional appraisal).
A home equity line of credit vs. home equity loan additionally requires proof that at least 20% of the home's value has already been paid off So, if you have yet to pay off at least that much of your home's value, then your choice of which instrument to apply for is made for you.
Purpose for the Money
If you wish to use the money borrowed in a lump sum for a single, one-time expense (ie. a particular renovation, to emergency, a desired purchase, or to consolidate debt), then a home equity loan may be the better choice.
If you do not have a single, particular use for the money in mind and do not think you'll need the money all at once but rather feel that you'll be needing it on a periodic basis (ie. for lengthy and drawn-out remodels, medical bills, or college tuition that payments will be made in intermittent sums), then a home equity line of credit loan may be the better choice.
The HELOC gives you a flexibility that a home equity loan does not, Allowing you to borrow however much you need, at the time that you need it, rather than taking more out than you need at and once, subsequently, paying interest on the whole amount from day one. Rather than receiving a fixed lump sum all at once, with a HELOC, you're usually given credit checks or a card to use on an as needed basis. Part of the risk inherent in home equity lines of credit is that you could end up borrowing more over time that you can realistically pay off.
Interest Rate and Monthly Payments
Both HELOCs and Hels generally carry lower interest conventional rates than bank loans and credit cards, as they are secured by borrowing against your home. They both, however, commonly carry interest rates higher than that of your primary mortgage (or first mortgage). Interest on both instruments may be tax deductible (to find out, check with your tax advisor). Interest paid on both of these instruments (Hels and HELOCs) is also usually tax deductible, whereas interest paid on conventional bank loans and credit cards is not.
The interest rate and monthly payments on a home equity loan is fixed, Allowing you to budget accordingly, though in many cases you could opt for an adjustable rate (though that is not always advisable). The payment term on a home equity loan is also fixed, meaning that you must pay it off in full by a predetermined point in time.
The interest rate and monthly payments on a home equity line of credit is not fixed and will fluctuate over time, based on fluctuations in the prime rate, so budgeting accordingly can be much more challenging. The interest on a home equity line of credit rates is also typically higher than that of a home equity loan. The payment term on a home equity line of credit, however, is not fixed, and so long as you keep making minimum payments, you could conceivably stretch out the payment period indefinitely.
No Closing Costs
Like other loans, a home equity loan comes with certain closing costs must be covered that in advance of receiving the loan. There are usually no closing costs involved in a home equity line of credit as well as
refinance with no closing cost, Though you may have to pay for annual fee.
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