Should I get a home equity loan or
a home equity line of credit?
When you are a homeowner, it is possible to that you might be able to borrow from the property value of your home via a home equity line of credit (HELOC) or a home equity loan (HEL). Both of them are in essence become the second mortgage on the property.
What’s the main difference?
With a HELOC it means that you can draw funds, at an established limit, any time you need cash. There's usually a standard payment due monthly, with the choice to repay as much on the line as you want. The way in which you use and pay back funds on a HELOC is similar to the way you use and repay funds for other revolving personal lines of credit, like a credit card. With a HEL, you obtain a lump sum of cash and have a set monthly payment which you repay spanning an established time frame. With either product, the amount you are allowed to borrow is dependent on variables including your current income, total debts, the value of your property, the amount still owed against your mortgage as well as your credit profile.
The attractiveness of these categories of loans is their rates of interest, which are usually significantly lower than those found with credit cards or other traditional bank loans since they are secured against equity in your home. What's more, the interest you pay with a home equity line or loan is usually tax deductible.
How do I know which is right for me?
Typically, a HELOC is an effective choice to satisfy on-going cash needs like school tuition payments. A HEL is much more ideal whenever you need cash for a special, one-time purpose, along the lines of purchasing a vehicle or perhaps to pay for a significant remodel of your home
How do the costs compare?
Both home equity lines of credit and home equity loans generally have a greater rate of interest compared to that of a first mortgage. With a HEL, you could choose either a variable rate which changes in accordance with variations in the prime rate, or you may decide on a fixed rate of interest. With a fixed rate you will be able to plan for a predictable monthly payment without ever worrying that you payment will increase because interest rates rise. With a HEL, there's closing costs that should be considered that don't apply to HELOCs.
A HELOC is usually known for a lower initial rate of interest when compared to a HEL, however its rate fluctuates in accordance with the prime rate, so there exists more interest rate risk. In contrast to a HEL, where your monthly payments are a set amount, a HELOC makes it possible for you to borrow funds when needed and make interest only payments each month if that's what you choose to do. Additionally, you will find that there are typically no closing costs when you open a HELOC.
Above all, always remember that your home is the collateral for both a HELOC and a HEL. Should a HELOC’s easy access to cash tempt you to run up more debt than you can repay, or should you ever fail to make your payments, you could lose your house.