HELOC or Home Equity Loan? Don’t Choose Until You Read This

Are you a homeowner who could benefit from using equity in your home? Perhaps you have a student in college, home improvements you need to make, or an amazing business you want to start that could really use a boost? A Home Equity Line of Credit (HELOC) or a Home Equity Loan are among your top options to access the money you need. Either type of loan can be a great resource for homeowners. However, it is important to know the difference between the two to make the right choice for your unique situation.  

Understanding Your Home Equity Borrowing Options

Even though there are some differences between a HELOC and a Home Equity Loan, both do require the homeowner to have substantial equity. Both loan types are based on the available equity in your home, which can be found by subtracting the balance of your current mortgage(s) on the home from the appraised value.

What is a Home Equity Loan?

This type of home loan is often used for home renovations, large, planned expenses, and high-interest debt consolidation. Referred to as a second mortgage, this loan offers a fixed interest rate with set monthly payments. Upon approval, you will receive a lump sum of money to spend however you like. 

What is a HELOC?

This type of home loan is actually an approved revolving credit line issued by your local credit union. A HELOC operates much like a credit card, where the interest rate is variable versus fixed. Your credit limit is based on the equity you have in your home, and the loan does offer substantially lower interest rates than credit cards. Homeowners will borrow or draw money as needed from the HELOC and pay it back over time via affordable monthly payments. The draw period is the initial phase of the HELOC when you can access funds after approval. 

Key Difference Between a HELOC and a Home Equity Loan

The key differences between a Home Equity Loan vs HELOC is that home equity loans have a set interest rate, whereas a HELOC typically has adjustable interest rates, like credit cards. Set interest rates also mean a set payment, which can help with long-term budgeting. Payments with a HELOC are adjustable, meaning they can change from month to month. In addition, the funds are accessed differently, with a HELOC being used as a line of credit and the loan being paid in a lump sum with monthly payments for a set term. 

Choosing the Right Option for Your Financial Needs

Determining the advantages of a home equity loan vs. HELOC means weighing the differences between the two types of loans to see the pros and cons so that you can make an educated decision based on your situation and financial goals. 

Pros and Cons of Each Option

Pros of HELOC

• Lower Interest Rates - Homeowners get better loan rates when they borrow against the equity in their homes than with most credit cards. 

• Easy Access to Funds - Securing a HELOC now ensures access to funds should you need them later via a check or debit card. 

• No Penalty for Use – A HELOC lets you access your money when you need it without paying early withdrawal fees or penalties.  

Cons of HELOC

• Change in Housing Market - If the real estate market conditions change, your property may lose value, meaning that you owe more than it’s worth.  

• Home Foreclosure – A HELOC uses your house as the collateral for the loan, meaning you risk losing the property if you fail to repay the loan properly.

• Risk of More Debt – Be careful not to make excessive purchases which can burden you with more debt than you started with. 
  
  

Pros of Home Equity Loans 

• Single Monthly Payment -When debt is consolidated, it is often reduced to just a single payment per month, making your bill-paying routine simple. 

• Clear Pathway to Goals – A Home Equity Loan offers a set interest rate over a pre-determined amount of time, so you can clearly set your financial goals.  

• Lower Payments – A set loan term with lower interest rates equals a lower monthly payment, which gives you extra money in your budget to pay off your debt quicker.

Cons of Home Equity Loans

• Tax Deductions - Recent tax law changes limit the deductibility of Home Equity Loans to include only interest from funds used for building and home renovations.

• Time Consuming Loan Process – A Home Equity Loan requires an in-depth loan process which often includes tax returns, a home appraisal, bank statements, and other financial documents, which can take up to 30 days for approval.

• Loan Costs – A Home Equity Loan has fees that include closing costs, lender fees, and appraisals that are required to be paid by the homeowner. 

CCCU Can Help You Decide Which Home Loan Product is Best for Your Unique Situation

Working with the right lender for your HELOC or Home Equity Loan is crucial. Your trusted lender can help you evaluate both options to choose the solution that best fits your needs. Your local credit union offers a variety of valuable financial tools, including HELOCs, as well as loan professionals to assist you in choosing the right loan. Contact our team today to learn more about a HELOC vs a Home Equity for your needs.