If you're a homeowner, you may tap into the equity you've built up in your home to finance your projects and achieve your goals. Whether you’re looking for a lump sum installment loan or a revolving credit line, we’re here to help you find the option that best fits your needs.
If you live in Weber, Morgan, or Davis Counties in Utah, you may be able to get great rates for either a home equity loan or a HELOC. Read on for everything you need to know about a HELOC vs home equity loan including the pros and cons of HELOCs and home equity loans.
WHAT IS HOME EQUITY?
Equity is the portion of your home's value that you own because you have paid down your mortgage and/or your home has gained in value. A home equity loan and a home equity line of credit (HELOC) let you tap into the equity of your home and access funds, using your home as collateral.
You can work out how much home equity you have by subtracting the balance you owe on your mortgage from the current market value of your home. Lenders may approve you to borrow a specific percentage of the equity you have.
When applying for a home equity line of credit or loan, your lender will also look at how much your home is worth and may order an appraisal. They will also look at your credit history, debt, and income during the loan qualification process.
HOME EQUITY LOANS
A home equity loan is secured by your home’s equity. It enables you to borrow a fixed amount of money, which you receive in one lump sum. Typically, these loans offer a fixed term, with a fixed interest rate and monthly payment. A home equity loan is a good way to fund major projects or a single large expense.
A major benefit of a home equity loan is the fixed interest rate. As a borrower, you’ll know exactly how much you’ll be paying each month, and that payment will cover both the principal loan amount and the interest. These clear terms can help you know what to expect throughout the length of the loan.
However, receiving all the funds at one time means you’ll need to pace your spending and know how much money you need upfront. Additionally, you’ll need to be prepared for the payment every month.
Pros of home equity loans:
- Fixed loan terms, interest rate, and monthly payment offer easy budgeting
- Receive all the funds in a lump sum
- If used to improve your home, the loan interest may be tax deductible
Cons of home equity loans:
- Once the funds are gone, you can’t receive more – you’ll need to pace your spending
- Credit score is very important for your interest rate
HOME EQUITY LINES OF CREDIT
A home equity line of credit is also secured by the equity of your home. A HELOC is similar to a credit card and allows you to borrow what you need from a set amount of money available. This extends over a specified time known as the “draw period.”
You will then pay back those funds and pay interest on the amount you draw from the HELOC. These loans also have variable interest rates, which means that your interest amount will fluctuate throughout your loan as the market rates change.
A HELOC provides freedom and flexibility in how you use your money. If you are unsure about the final cost of your project, it’s beneficial to have the option to withdraw money as needed. To maintain a good credit score, it's best not to use your entire HELOC loan amount. If you use all the funds, it's equivalent to maxing out your credit card.
Repayment options are often flexible and monthly payments during the draw period will vary. Some lenders may require a monthly payment of principal and interest. Others may only require a monthly payment of interest and then a full payment of the loan amount at the end of the draw period. The repayment period may be as long as 20 years.
Pros of home equity lines of credit:
- Freedom and flexibility for funds and repayment
- Borrow the funds you need as you need them
- Only pay interest on the funds you use
- If used to improve your home, the loan interest may be tax deductible
Cons of home equity lines of credit:
- The interest rate will fluctuate throughout your loan
- You may need to pay back the full loan amount at one time
THE SIMILARITIES: HELOC VS. HOME EQUITY LOAN
When it comes to accessing the value you have stored in your home, a home equity line of credit (HELOC) and a home equity loan have a lot in common.
Both HELOCs and home equity loans are secured by your home, which means you can generally get lower interest rates than for credit cards or unsecured personal loans.
USE OF FUNDS
In addition, both options let you use the funds in a wide range of ways. From home improvements to vacations, weddings, and debt consolidation, HELOCs and home equity loans are ideal for covering significant expenses. Another great feature is that the interest you pay may be tax deductible if you use the funds to substantially improve your home.
IMPACT ON FINANCES
HELOCs and home equity loans can impact your finances in several ways. Both offer a convenient source of funds and will likely have a positive impact on your credit score — provided you make timely payments each month.
Because they place a lien on your home, HELOCs and home equity loans are sometimes called second mortgages. If you own your home free and clear, then the loan will be your primary mortgage. Keep in mind that your home may be seized (and your credit drop) if you fail to make payments.
THE DIFFERENCES: HELOC VS. HOME EQUITY LOAN
Now you have a solid understanding of the similarities between these financial tools, and how they work, let's take a quick look at the key differences between HELOCs and home equity loans.
VARIABLE VS. FIXED RATES
HELOC interest rates are variable so they may go up and down during your draw period and the repayment period. Whether you're making interest-only payments or interest and principal payments, you will need to keep an eye on what you owe each month and be prepared for your rates to change with the markets.
If you pay off your HELOC balance in full, you won't need to pay interest. But keep in mind that your lender may require you to use a certain amount of funds for a minimum number of years.
Home equity loan rates are fixed and your monthly payments are also fixed, so budgeting can be easier. But keep in mind that if market rates go down in the future, you'll still need to pay the rate you got when you took out the loan – unless you refinance.
HOW YOU GET THE FUNDS
HELOCs work like credit cards so you can use the funds as and when needed up to your credit limit. Depending on your lender, you can transfer the funds from your HELOC account into your checking account or make withdrawals at an ATM.
Home equity loan funds will be deposited into your preferred account in one lump sum. You can then transfer any funds to other accounts or use the funds to pay for your expenses using your regular debit card or checkbook.
HELOC repayment amounts may vary widely from month to month based on how much funds you use. Like a credit card, you may have a minimum amount due or can pay more. You can make payments by transferring funds to your HELOC account or in person at a branch.
Home equity loans have variable rates, so the payment can change monthly based on your balance and the current rate.
WHICH IS BETTER?
Now for the big question, how can you choose between a home equity line of credit and a home equity loan? Well, the answer depends on you. To tap into your home equity, carefully review the pros and cons of each loan and how you’ll use the funds. You may find that you need all the funds for your project at once or that you want to pay for things as you go.
Additionally, your budget may be flexible enough for a changing interest rate or you may need a set payment amount. Both a home equity loan and a HELOC can provide a great opportunity for you to utilize the funds tied up in your home.
Wasatch Peaks is here to help homeowners in Weber, Morgan, or Davis Counties in Utah make the most of your home equity. Our home loan specialists offer expert guidance so you can find the best loan for you!