Making the choice between getting a line of credit and applying for a home equity loan is a tough decision to make. Both will be tapping into your home equity, which means that to get either loan, you’ll be using your home as collateral. However, getting a home equity loan or applying for a line of credit is certainly smarter and easier than getting a personal loan. If you need money to pay off high-interest credit card debts, send your child to college, finish your basement, renovate your home to bring up its value, or invest, using your home equity by accessing it through a loan can really give you the breathing space you need with your finances.
Why is choosing between a HELOC and a home equity loan such a challenge? Since both loans tap home equity, shouldn’t they be basically the same? The reason why it can get confusing to pick between a home equity loan and a HELOC is because both of them have a lot of benefits, but which one will be more beneficial is based on case to case scenario. Their key differences are explored below.
Interest Rates
A HELOC typically has a variable interest rate that is dependent on a prime rate. This means that if the prime rate goes down, the payment you need to make also goes down. If the prime rate goes up, then you’ll have to pay more per month.
A home equity loan has a fixed interest rate that takes away the surprise of getting charged more on certain months. You won’t get shocked with higher billing when market rates change. A lot of people find this very comforting and allows them to manage making payments easier.
The rates for both HELOCs and home equity loans are about 50-66% lower than credit card rates. That’s a lot of savings!
Payment Schedule
A HELOC usually has a variable payment schedule or amount. Each month, you will be charged a minimum payment based on your balance. The due date differs by each month too.
A home equity loan follows a monthly payment schedule that has been agreed to in advance. You’ll know exactly when the bill will be due months in advance because it is stipulated in the agreement.
Use of Funds
Lines of credit are used by companies and people to help them cope with erratic cash flow. The flexible lines of credit serve as bridges to fill the timing gap between sources of funds and expenses.
Because funds are given as a lump sum for a home equity loan, the money can be used to fund one-time big expenses such as a wedding, extensive home renovation, property taxes, and consolidating debts.
Do you have more questions that were not addressed above? Contact us to get answers before applying for a home equity loan or a line of credit. Our mortgage professionals will be glad to help and tell you more about ways to use a HELOC and ways to use a home equity loan.
