Home Equity Loan vs HELOC: What's the Difference?
What is a Home Equity Loan?
A home equity loan is a type of loan that allows homeowners to borrow money from the equity in their homes. It is a secured loan, meaning the loan is secured by the borrower's home equity. The loan amount is typically based on the difference between the borrower's current mortgage balance and the home's appraised value.
What is a Home Equity Line of Credit (HELOC)?
A home equity line of credit (HELOC) is a revolving line of credit that allows homeowners to borrow funds as needed. Unlike a home equity loan, the borrower only pays interest on the funds they actually use. The borrower can access funds up to their approved line of credit limit whenever they need them. The interest rate on a HELOC is typically adjustable.
Benefits of a Home Equity Loan vs HELOC
A home equity loan is a great way for homeowners to access funds for large purchases or to consolidate debt. It has a fixed interest rate and a fixed payment, so it's easy to budget for. It also allows the borrower to access all of the funds up front. A HELOC is a good option for short-term borrowing or for borrowers who don't want to commit to a fixed payment for a long period of time.
Pros and Cons of a Home Equity Loan
The biggest benefit of a home equity loan is the predictable payments and low interest rates. The biggest downside is that you must use the loan proceeds for a specific purpose and you can't access additional funds until the loan is paid off. Additionally, if you fail to make your payments, you may be at risk of foreclosure.
Pros and Cons of a HELOC
A HELOC is a good choice if you need access to funds on an ongoing basis. The biggest benefit is that you only pay interest on the funds you actually use. Additionally, you can access additional funds up to your approved line of credit limit. The biggest downside is that the interest rate is typically adjustable, so your payments may increase over time.
Which Option is Right for You?
When deciding between a home equity loan and a HELOC, it's important to consider your long-term goals and financial situation. A home equity loan is a great choice if you need a lump sum of cash for a specific purpose and you're comfortable with fixed payments. A HELOC is a better choice if you need access to funds on an ongoing basis and you're comfortable with variable payments.
Conclusion
A home equity loan and HELOC are both great options for homeowners looking to access funds for various purposes. It's important to consider your long-term goals and financial situation when deciding which option is right for you. If you need help deciding, it's always a good idea to speak to a financial advisor who can help you make the best decision.