HELOC vs Home Equity Loan
What is equity?
Home equity is the difference between the value of your home and how much you owe on your mortgage. Often, a home owner’s largest amount of net worth is in their home. The combination of property appreciation and payments toward principal have accumulated equity. By leveraging the equity you’ve built in your home you are able to unlock extra money.
When you need funds, taking equity out of your home is a good short/long term solution to free up cash flow or to increase available liquid cash for whatever your needs. An equity take out mortgage will usually make better financial sense than other means of borrowing. As loans secured by property are usually offered at better interest rates and the lending criteria are far more flexible than unsecured loans or credit card debt.
HELOC VS Home Equity Loan
Both home equity loans and HELOCs allow homeowners to gain access to equity. The funds can be used for various purposes, including consolidating debt and making home improvements. However, there are distinct differences between home equity loans and HELOCs.
HELOC (Home Equity Line Of Credit)
A home equity line of credit is a flexible line of credit that you can withdraw funds from as you need them. It is revolving credit which allows you to take out money against the credit line up to a fixed amount. HELOC shares similar characteristics with a credit card because both are revolving credit lines, you withdraw money pay it back and are able to withdraw again. The line of credit remains open until its term ends.
The main benefit of a HELOC is that you only pay interest on what you borrow. Say you need $50,000 over 2 years to pay for home renovations. With a HELOC, your interest payments would gradually increase as your loan balance grows. If instead you had taken out a lump-sum loan like a home equity loan for $50,000, you would be paying interest on the entire $50,000 from day one.
Home Equity Loan
With a home equity loan, it allows you to borrow the funds you need all at once for a specific set out term. Home equity loans are often referred to as second mortgages, a home equity installment loan or an equity loan.
Once you receive the loan, your repayment with interest starts. Typically, home equity loan payments are fixed and paid monthly.
What Can You Use the Equity for?
The equity can be used for a multitude of things such as repairs or renovations of the property, to use as a down payment for a vacation property or an investment property or many other purposes. You can borrow up to a total of 80% of the appraised value of your home.
Work With ME
Got questions, or want to explore options?
I’m more than happy to get in touch!
