As a homeowner, you have several options for turning the equity in your home into cash. As home values soar, so do your opportunities to turn that value into cash you can use for other goals. But you may wonder what the difference between an equity loan and a home equity line is. And how do you choose between a home equity loan vs. a HELOC or home equity line of credit? Are there even more options than those? This guide on pros and cons can help.
Home Loans and Mortgage Refinancing
HELOC vs. Home Equity Loan: What Is the Difference?
To understand the difference between a HELOC and a home equity loan, first, you need to know what it means when discussing the equity in your home. Equity is the difference between your home’s current value and the balance of your mortgage. Home values have increased nationwide, and in some areas of the country, they have skyrocketed. That means you could have growing equity that you can tap for all kinds of things, including paying down debt, covering college costs, completing remodeling projects or buying a car. However, before you take action, it’s wise to understand the pros and cons of a HELOC vs. a home equity loan. No matter which one you choose, most lenders require an appraisal, and there will be closing costs as well.
Pros and Cons of a HELOC
As your home value increases, you can access the value as a home equity line of credit. Therefore, a HELOC could be a good idea right now since home values have continued to climb. A HELOC is like a credit card wherein you use the available credit when you need it, up to the amount approved by your lender and then pay it back with interest. The amount you are allowed to borrow is based on the equity you have in your home, as explained above. You only pay the interest of the amount on the HELOC you use.
A disadvantage of a HELOC is that the interest rate is variable, which means it can go up over time based on factors in the U.S. economy that you cannot control. Also, the interest rate will be lower than what credit card companies can charge. That’s due, in part, to the fact that your home is used as collateral on the HELOC, which can be a drawback if you can’t make monthly payments because you risk foreclosure and the bank seizing your home. Another downside is that you might be inclined to draw on your HELOC without planning ahead on how you will pay it back since the money is readily available once you are approved for the line of credit. On the other hand, HELOCs offer flexible payment terms. Depending on how much you borrow and the lender you choose, you could make interest-only payments on the loan for several years. That’s a pro that could turn into a con over time if home values drop and you end up owing more than your house is worth. Also, the longer you owe them money, the more you will pay in interest.
Pros and Cons of a Home Equity Loan
There are pros and cons of a home equity loan as well. Unlike a HELOC, the interest rate on a home equity loan is fixed and will not change throughout the loan. You borrow a lump sum once the loan is approved by the bank, credit union or other financial institution, so you know how much you owe from the beginning, making it easier to budget for the loan. Home equity loans are usually faster to apply for than some other types of loans. As with a HELOC, you can use the money for any purpose, not just expenses related to your home. And as with a HELOC, the longer it takes you to pay back a home equity loan, the more interest you will pay. Another downside to home equity loans is that you use your home as collateral. That means you could be at risk of losing your home if you are, and the lender is forced to claim your assets in order to make good on the home equity loan. The equity in your home could fall if property values decline, so be sure you can make monthly payments on a home equity loan over the life of the loan. For this reason, lenders will be cautious about approving the loan if you have too much debt or bad credit. In fact, they will likely deny your application for a home equity loan or a HELOC in that situation.
Home Loans and Mortgage Refinancing
HELOC vs. Home Equity Loan: Which One is Better?
Most financial decisions hinge on your personal circumstances. And deciding which is better, a HELOC or a home equity loan, is one such decision. But how do you determine between HELOC and home equity loans? Once you look at all the pros and cons and weigh them against your financial situation, you will be able to decide between a HELOC or home equity loan – or choose a different option altogether.
When It’s Better to Choose a HELOC
It’s better to choose a home equity line of credit if you don’t know how much money you will need or when exactly you will need it. Once you’re approved for a HELOC, you can draw on the money and pay it back at your discretion for a number of years. There are no restrictions on how you use the money, so it might be better to choose a HELOC to pay off debts that have a higher interest rate than you will be charged with a HELOC. Or you might decide to use a HELOC for college costs or other expenses at a time when your home has increased in value and there is equity built up.
When It’s Better to Choose a Home Equity Loan
Choosing a home equity loan is better when you want a consistent payment schedule and a fixed interest rate that won’t fluctuate with the market like the interest rate on a HELOC would. For example, some borrowers want to know exactly what their monthly debt payments will be. A home equity loan would offer that, while credit card debt, HELOCs and other types of debt would not offer that same consistency. Also, it’s better to choose a home equity loan if you know how much money you need. For example, if you are remodeling a room in your house or making other improvements, you could get a firm estimate and borrow that much money for the project. Then, at tax time, you will be able to deduct the interest payments on your home equity loan since you used the money for home improvements.
Consider a Cash-Out Refinance as an Alternative
Another alternative to a HELOC or home equity loan is a cash-out refinance. It replaces your current mortgage loan with a new mortgage with a higher balance. At closing, you will get the difference in cash, less the closing costs and other refinancing fees. If this option appeals to you, a reputable lender like loanDepot can help you make it happen. loanDepot’s nationwide team of 10,000-plus members assists more than 27,000 customers each month.
There are many reasons to refinance, including locking in a fixed-rate loan versus an adjustable rate, for cash to complete home improvement projects or pay down high-interest debt, or eliminate private mortgage insurance. loanDepot specializes in cash-out refinance loans with licensed lending officers who help you decide which options are right for you. In addition to refinancing, you can count on loanDepot for:
- Home purchase loans with fixed-rate and adjustable-rate options.
- New construction partnerships with builders nationwide.
- Jumbo loans for high-end homes.
Consult with licensed lending officers at loanDepot or apply online today. They will be in touch about available loans when they have reviewed your information.