Comparing Home Equity Loans vs HELOC: Which Should You Choose?

Comparing Home Equity Loans vs HELOC: Which Should You Choose?

So, you’ve been in your home for a while now and you’ve accumulated a fair amount of equity in your home. That’s great news, because now you may access some of that money in the form of a home equity loan or line of credit. This opens the doors to any number of possibilities, as you can use these funds any way that you’d like to. From renovating your home to financing a dream wedding, the possibilities are endless if you can fit this type of loan or credit into your already-scheduled monthly payments. But first, you need to make one important decision:

Will you choose to make use of a fixed-rate home equity loan, or a home equity line of credit (otherwise known as HELOC)?

Both options are great, but for different purposes. They carry with them their own drawbacks and advantages, which you should know of before you make this choice. Continue reading to compare between home equity loans and home equity lines of credit.

Choosing a Home Equity Fixed-Rate Loan

If you are looking for a single, lump-sum payment so that you may fund a large expense, a home equity loan is a great option. This type of loan against your home’s equity functions very similarly to loans of other types.

The Pros

  • You get the benefit of a fixed interest rate.
  • You acquire all of the funds that you need, all at once.
  • Interest is usually tax-deductible up to a certain amount, depending on your location.

The Cons

  • Interest rates are typically higher due to the benefit of a fixed interest rate on the loan.
  • You cannot withdraw additional funds from the loan.

As a side note, if your bank does not approve you for a Home Equity loan you can try securing second mortgage from a private lender. More can be found here:

Choosing a Home Equity Line of Credit (HELOC)

For those who aren’t sure exactly how much they need, like homeowners looking to perform renovations on a grand scale, a HELOC is a great alternative to a fixed-rate loan. A HELOC essentially functions like any other line of credit.

The Pros

  • Withdraw money from the line of credit only as needed.
  • Pay for gradual expenses rather than spending all at once.
  • Interest rates are often lower than fixed-rate home equity loans.
  • You might be able to pay only toward your interest for a fixed time period, which may reduce your monthly payments until you begin to pay the principal on the loan.

The Cons

  • HELOCs have an adjustable interest rate. This means that if interest rates drop, so do the rates on your loan. But if they increase on the overall market, your interest rate will go up accordingly.

Borrowing from Home Equity Can Be Risky

One distinct downside of all forms of home equity access is the fact that you are using your home as collateral. This means that if you fall behind on or default on your loan, you risk your home going into foreclosure. You should only pursue this type of loan if you are absolutely confident that you can easily work the monthly interest and principal payments into your monthly payments routine.

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